Donald Trump isn’t the only one who can move a market with a tweet.
This week, The Verge revealed that John McAfee charges on a per-tweet basis to promote Initial Coin Offerings to his 813,000 Twitter followers. He has had plenty of takers, and success.
This should scare investors.
McAfee is an interesting character. As a young, talented programmer, he was on the front lines of computer innovation. Between 1968 and the middle 1980s, he worked for NASA, Xerox (XRX), Computer Sciences (CS), Booz Allen Hamilton (BAH) and Lockheed (LMT). In 1987, he founded McAfee & Associates, the first developer of commercial antivirus software.
After resigning from McAfee in 1994, he continued to innovate. He invested in Zone Labs, a firewall software firm, that was later sold to Check Point Software (CHKP) in 2003. He spent the next decade in Central America trying to develop all-natural antibiotics.
That is when things got murky.
‘Paranoid, Even Bonkers’
In November 2012, Belize police called McAfee a person of interest in the murder of his neighbor, Gregory Viant Faull. McAfee was apprehended. Gaunt, disheveled and covered with tattoos, he refused to answer even routine questions.
Dean Barrow, Belize’s prime minister, offered an extraordinary characterization of McAfee to The Daily Telegraph:
“I don’t want to be unkind to the gentleman, but I believe he is extremely paranoid, even bonkers.”
McAfee later fled to Guatemala, where he was arrested and eventually deported to the United States.
Would You Listen to this Guy?
In February 2016, McAfee claimed he could easily hack the iPhone used by the San Bernardino, Calif., terrorists. Later that year, he said he could read encrypted messages on the Android operating system.
Neither claim proved to be true.
Since then, McAfee has become an outspoken proponent of cryptocurrencies. In February, with most digital coins in freefall, in a series of tweets, he doubled down on his prediction that Bitcoin would reach $1 million by 2020.
His prognosis and motives may not be so pure.
His McAfee Crypto Team is a cryptocurrency promotion company. Its website boasts how his endorsement materially boosts the value of alternative digital coins. The website is full of charts, hyperbole and outlandish claims. Promotions cost $105,000 per tweet. Coordination with professionally written blogs will run extra.
The type of paid promotion isn’t limited to the crypto space. It can happen in any industry, but it’s most often seen among small caps, where analyst coverage is often hard to come by.
That doesn’t mean you can’t take an occasional flyer on a newer, smaller or relatively unknown asset. But making any investment, no matter how small, without first doing your own homework is a risk you can’t afford to take.
A $32M ‘Web of Lies’
Paid promotions are often a prelude to pump-and-dump schemes. First, the manipulators lure unsuspecting investors, pumping up the price. When they are all in, the scammers dump. Just like we saw this week …
This week, the Securities and Exchange Commission filed charges against the co-founders of Centra Tech Inc., a Florida startup registered in Delaware. The complaint alleges Sohrab Sharma and Robert Farkas, its 26-year-old cofounders, sought to defraud investors of $32 million through an Initial Coin Offering.
The ICO was promoted by boxing champion Floyd Mayweather, and DJ Khaled, a well-known music producer. It also promised a unique relationship with Visa and Mastercard to provide liquidity.
As it turns out … that arrangement did not exist.
In a press release, the SEC called this “a sophisticated marketing campaign to spin a web of lies about their supposed partnerships with legitimate businesses.”
Unfortunately, it won’t be the last time we hear about something like this.
In early February, near the height of the crypto craze, I told my members to expect many of these schemes would fall apart under the scrutiny of government regulators. I compared the cryptocurrency euphoria to a rush in the shares of a tiny gold explorer that has almost no prospect of actually finding gold.
The current state of cryptocurrency looks a lot like some parts of the junior resource sector. There are plenty of companies with access to producing gold mines and a plan to get that gold out of the ground and on the open market. But there is also the occasional shady operator with bogus claims and, thus, a big target on its back for regulators.
There is also the promise of something really great. Longer term — just like you can strike gold in the junior mining space — I also believe there will also be real value in a small number of cryptocurrencies. But significantly higher prices are only likely after many of the ICOs vanish.
Believe in the $7.7B
Promise of Blockchain
In the interim, I suggest crypto-interested investors turn their attention to blockchain … and blockchain stocks.
In addition to its large cloud-computing operation, Azure, Microsoft (MSFT) is making great inroads with Blockchain-as-a-Service. The big idea is that the foundational distributed ledger system central to cryptocurrency can be monetized on a pay-as-you-go basis. The concept is finding a lot of interest, and Microsoft has first-mover status.
Research and Markets, a specialty research group, noted in January that demand for blockchain is expected to grow from $411 million in 2017, to $7.7 billion by 2022. That would put the compound growth rate at 79.6%.
Among publicly traded entities, Microsoft is expected to be a big winner. Investors should look to buy dips.
Jon D. Markman