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The Wolf Den #561 - Scams, Hacks, Darknets and Crime

August 18 · Issue #561 · View online
The Wolf Den Crypto Newsletter
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In This Issue:
  1. Scams, Hacks, Darknets and Crime
  2. Ethereum On-Chain Activity Prior To The Upcoming Merge - IntoTheBlock
  3. Legacy Markets
  4. The Biggest Institutions Are Here
  5. Misconceptions About The Merge
  6. Ontario Did What?
  7. Crypto Contagion Over? Can The Ethereum Merge Spark A New Bull Market? Raoul Pal, Anthony Scaramucci And Mark Yusko
  8. My Recommended Platforms And Tools
Scams, Hacks, Darknets and Crime
Does it seem like 2022 has been the worst year for illicit activity in crypto? I hate to say that it is the “wild west,” because the term is an overused simplification, but it feels like bandits are making off with our money at an unprecedented rate.
If you disagree, you are actually right. The data around illicit activity is far more nuanced than the headlines would lead us to believe.
I covered this exact topic yesterday in a short news segment titled, “Scams Are Slowing Down,” which was based on a recent research report from Chainanalysis. I wanted to revisit the findings because, in crypto, it’s far too easy to assume the worst. For instance, just this year alone, we had record-breaking DeFi hacks - namely Ronin, Wormhole, and Beanstalk. Just last week Solana wallets were drained. We all have PTSD and are shell shocked, waiting to open our wallets and find them empty. But things are not as bad as they seem.
The first thing that the report does is to distinguish the 3 different types of illicit activity that dominate the crypto space: scams, darknet markets, and hacking/stolen funds. The results are far from black and white. You will see what I mean. 
Value received by illicit entities (scams) is down 15% vs. last year but so too is the value received from non-illicit (legitimate) activities, which is down 36%. In summation, legitimate volume this year has dropped faster than illegitimate volume by a factor of two. Scams are more resilient to the bear market but are down overall. Although I like the baseline of showing overall volume, there is also the consideration of the percentage of new entrants in the market, who are most likely to fall for scams.
Another nuance in the discussion of illicit activity is how falling prices affect data. For instance, if Bitcoin was 3x more valuable in 2021 than it was in 2022 then it’s easier to conclude scams were worse if you don’t dig into the numbers based on USD value. As a hypothetical, let’s say Bitcoin was worth $60,000 on average in 2021 and $20,000 in 2022. If that were the case, then 100 Bitcoins stolen in 2021 would be a USD equivalent to 300 Bitcoins stolen in 2022. But 300 Bitcoins is clearly worse than 100 Bitcoins.
The report shows that scam revenue closely mirrors the Bitcoin chart. Until the two diverge, it’s hard to argue scams have significantly decreased. What was positive in the scam category is the fact that fewer people overall are falling for scams. There is an undeniable drop in the number of total victims, which could be attributed to better education. I’m going to conclude that for the category of scams, there isn’t a definitive improvement.
Darknet Markets
Darknet market revenue is reportedly down 43% from this point last year. Furthermore, the cumulative value sent to darknets is sitting below 2021 and 2020 and is on pace to cross below 2019’s value sent. A major contributor to this year’s decrease in value sent relates to authorities shutting down Hydra market, a well-known criminal hotspot for drugs, hacking tools, stolen data, and money laundering services. Total deposits to the darknet are also well below the 2021 and 2020 numbers. Law enforcement are doing their job and crypto is being used less for illicit activity. This is positive.
Hacking and Stolen Funds
This category is the worst… but maybe not as bad as we think. 2022 is currently worse than 2021 and other years in terms of cumulative monthly stolen funds in USD - by about 35% as of July. According to Chainanalysis, it is suspected that North Korea’s Lazarus Group has stolen over $1 billion in 2022 alone.
2021’s worst hack came in August, so the numbers are misleading. If there are no major incidences this month, then 2022 will likely fall BEHIND 2021.
Hacks are a tough category to avoid. It’s code-dependent, a foreign language to 99% of us who aren’t capable of understanding the plumbing. Our only safety net is using major platforms or self-custody and hoping for the best. And even with all of the known hacks, DeFi users won’t stop using platforms, which means that there are endless green fields for bad actors.
Overall, I think it’s safe to say that the current state of the crypto market isn’t as bad as the headlines. Darknet activity is down dramatically, scams are about even, and hacks could eke out a year better than the last if we get our shit together.
In the coming years, all three of these categories will see massive improvements and the “wild west” moniker will be a distant memory.
Ethereum On-Chain Activity Prior To The Upcoming Merge - IntoTheBlock
In this report, we bring to you the latest in on-chain cryptocurrency analysis. We look at the blockchain directly and analyze balances, transactions, and the overall activity of market participants. This gives us a unique insight into the future of the market.
This section is written in conjunction with IntoTheBlock (ITB).  ITB is an intelligence company that leverages machine learning and advanced statistics to extract intelligent signals tailored to crypto-assets. IntoTheBlock tackles one of the hardest problems in crypto: to provide investors with a view of a crypto asset that goes beyond price and volume data. 
The Wolf Den research team uses IntoTheBlock to dig deeper and get the most important insights about the crypto market.
Ethereum On-Chain Activity Prior To The Upcoming Merge
After successfully migrating the Goerli testnet into proof of stake (PoS) on August 10th, the anticipated Ethereum merge follows and is expected to come the 15th - 16th of September. This will mark Ethereum’s transition into proof of stake, in which Ethereum will migrate into the Beacon chain. In this process, Ethereum’s energy footprint will be reduced by 99% and its ETH issuance by 90%. Despite the merge being one of the most important dates in the Ethereum’s history, on-chain activity has been decreasing throughout the past 3 months as interest for DeFi and NFTs diminishes.
The Total Fees indicator shows the total amount paid in fees to use the blockchain on a given day. Due to the market situation Ethereum’s activity has decreased:
  • Total fees has dropped 48% in the last 90 days
  • Net issuance has increased 3% in last 90 days
  • The average transaction paid by user in the Ethereum network has decreased 50% in the last 90 days from $5.2 to $2.6
The daily ETH Burned indicator show the amount of Eth burned since EIP 1559  was implemented.
  • During the last 90 days a total of 241k ETH has been burned
  • The daily amount of ETH burned has dropped approximately 50% in the past 90 days, from 2.12k to 1.06k
  • The percentage burned of total fees has dropped approximately 6% in the last 90 days from 78% to 72%. This is due to the diminishing network activity.
Legacy Markets
US Futures Muted Amid Fed Concerns; Dollar Stalls: Markets Wrap - Bloomberg
Here are some key events to watch this week:
  • U.S. existing home sales, initial jobless claims, Conference Board leading index, Thursday
  • Fed’s Esther George, Neel Kashkari speak at separate events, Thursday
Some of the main moves in markets:
  • Futures on the S&P 500 rose 0.1% as of 7:33 a.m. New York time
  • Futures on the Nasdaq 100 added 0.1%
  • Futures on the Dow Jones Industrial Average were little changed
  • The Stoxx Europe 600 rose 0.2%
  • The MSCI World index was little changed
  • The Bloomberg Dollar Spot Index was little changed
  • The euro was little changed at $1.0184
  • The British pound rose 0.1% to $1.2062
  • The Japanese yen was little changed at 134.95 per dollar
  • The yield on 10-year Treasuries declined two basis points to 2.87%
  • Germany’s 10-year yield advanced two basis points to 1.11%
  • Britain’s 10-year yield advanced one basis point to 2.30%
  • West Texas Intermediate crude rose 1.2% to $89.19 a barrel
  • Gold futures rose 0.5% to $1,785.10 an ounce
The Biggest Institutions Are Here
Outside of our bubble, there is an entire real world where major companies are heavily investing in crypto infrastructure. Leading the pack are Alphabet, BlackRock, and Morgan Stanley with $1.5B, $1.1B, and $1.1B respectively invested into an assortment of companies. Imagine what happens when these companies want to add some crypto to their balance sheets. As CZ states, “they are silently in crypto already.”
Misconceptions About The Merge
The Merge |
The Ethereum foundation released an article that clarifies some disputed details of the merge. Here are the 8 common misconceptions listed on the site. Notanbly, the article, updated mid week, predicts the merge to happen “~Q3/Q4 2022,” so a delay is possible.
Misconception: “Running a node requires staking 32 ETH.”
Nodes that propose new blocks require 32 Ethereum, but there are also non-block producing nodes that, “sync their own self-verified copy of Ethereum” and only require a basic computer with an internet connection. Both are essential to the security of the network.
Misconception: “The Merge will reduce gas fees.”
Network throughput is not significantly changed from the merge. “Gas fees are a product of network demand relative to the capacity of the network.” The merge is an important step for the rollup-centric roadmap, which will lower fees over time. 
Misconception: “Transactions will be noticeably faster after The Merge.”
The difference in block production post-merge is ~10% faster. Proof-of-stake finality is more concerned with security over speed. Ethereum never was the fastest blockchain and won’t be anytime soon if ever.
Misconception: “You can withdraw staked ETH once The Merge occurs.”
We knew about this one. “Newly issued ETH, though accumulating on the Beacon Chain, will remain locked and illiquid for at least 6-12 months following the Merge.
Misconception: “Validators will not receive any liquid ETH rewards til the Shanghai upgrade when withdrawals are enabled.
This may seem counterintuitive to the above note that withdrawals are not enabled til the Shanghai upgrade, but validators WILL have immediate access to the fee rewards/MEV earned during block proposals.
Misconception: “When withdrawals are enabled, stakers will all exit at once.
Only six validators will be able to exit per epoch, every 6.4 minutes, or 1,350 per day. Depending on how much Ethereum is staked, this rate limit will adjust to incentivize stakers when need be.
Misconception: “Staking APR is expected to triple after the Merge.
Up-to-date assessments predict a 50% APR increase to ~7%. As network usage increases, we can expect this figure to also increase.
Misconception: “The Merge will result in downtime of the chain.
The merge is designed to transition seamlessly and a lot of effort has been put into this front. I will still suggest not using the network during the transition, but according to the Ethereum Foundation, “Ethereum does not have downtime.
Ontario Did What?
Ontario crypto exchanges impose $30K annual limit on altcoin buys
After cooperating with regulators, exchanges in Ontario are pulling the trigger and shooting themselves directly in the feet. Bitbuy and Newton, two Canadian-based exchanges, are implementing a $30,000 (CAD) annual “buy limit” for retail users. The limit excludes Bitcoin, Bitcoin Cash, Ethereum, and Litecoin.
It still amazes me that Litecoin and Bitcoin Cash are top picks for any new listing or ruling. They are still risky altcoins. For high-net-worth investors, this rule makes no sense. Further, some exchanges are now requiring a “trading questionnaire.” If you’re wondering why these changes are being made, it’s because Ontario regulators are stepping in and this is how they are attempting to “protect” citizens. Gross.
Crypto Contagion Over? Can The Ethereum Merge Spark A New Bull Market? Raoul Pal, Anthony Scaramucci And Mark Yusko
Crypto Contagion Over? Can The Ethereum Merge Spark A New Bull Market?
Today’s podcast will be recorded LIVE at 9:30 AM EST, then added to audio platforms this afternoon. This one should be epic.
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The views and opinions expressed here are solely my own and should in no way be interpreted as financial advice. Every investment and trading move involves risk. You should conduct your own research when making a decision. I am not a financial advisor. Nothing contained in this e-mail constitutes or shall be construed as an offering of financial instruments or as investment advice or recommendations of an investment strategy or whether or not to “Buy,” “Sell,” or “Hold” an investment.
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