On January 7, 2022, a class-action lawsuit was filed against the company and individuals behind the cryptocurrency EthereumMax. The suit also named Kim Kardashian, Floyd Mayweather and Paul Pierce as defendants.
The plaintiff alleged that the principals behind EthereumMax engineered a classic pump and dump scheme with the help of the named celebrities.
While it is hard to generalize from one case to all cryptocurrencies here are some of the key takeaways.
1. Avoid Copycat and ERC-20 Tokens Unless You Understand Their Utility
According to the plaintiff, it was no accident that the name of the token was EMAX. Unsophisticated investors would wrongly assume that EMAX tokens are the same as Ethereum (Ether) which is the second largest cryptocurrency.
The backers of EMAX correctly believed that using EthereumMax would give them instant credibility with investors. That is why a copycat token name is definitely a red flag.
ERC-20 tokens are tokens than run on the Ethereum blockchain. There are over 400,000 ERC-20 tokens that run on the Ethereum blockchain.
While not inherently bad, promoting an ERC-20 coin may, but need not, mean that the backers/developers lack the technical expertise to create a new blockchain and new currency to run on it.
2. Review the Whitepaper
EthereumMax launched on May 14, 2021 but the whitepaper was not released until October 2021. The whitepaper states that marketing strategy and managing relationships are what the backers of EMAX do best.
The whitepaper goes on to state that the backers have exiting relationships with …“some of the most influential people in the world.” The whitepaper contains a list of achievements including endorsements from celebrities, partnering with social media influencers with millions of followers, and sponsoring sporting events.
Comparing EthereumMax’s whitepaper to the similar sounding Ethereum reveals stark differences. Ethereum’s whitepaper is technical, encourages community engagement and contribution, and explains how changes to the protocol are made. In comparison, EthereumMax’s whitepaper reads like an longer version of an executive summary written to attract investors.
Marketing is important for any product, but whitepapers that highlight marketing and ties to social media influencers over technical expertise and vision can be a red flag.
3. Don’t Trust Celebrity Endorsements
Promoters use celebrities and social media influencers for a reason-instant credibility. While celebrities may know something about or even use a personal care product, it is highly unlikely they know much about a new crypto project.
Given that promoters pay celebrities and influencers for endorsements investors should not put too much faith in the posts and comments from these two groups. Investors should instead conduct their own due diligence before investing in a new cryptocurrency instead of relying on the opinions of paid spokespeople.
4. Verify Factual Claims
EthereumMax’s backers claimed that holders of EMAX could:
- Access exclusive experiences including digital NFTs, event tickets and merchandise
- Access to a community based NFT marketplace
- Join The Club, an exclusive member only NFT community, with exclusive content
In addition, EthereumMax plans and achievements included:
- NFT ticketing including an app to process and verify tickets for any type of event or venue
- Partnering with one of the …”leading mobile gamification companies in the world.”
- Exclusive NFT releases
- Developing and creating a complete end to end payment solution
Even a cursory fact check on the Internet reveals that there is no good evidence of the claims being true, or that work has begun on these projects.
For detailed description of these claims see: https://ethereummax.org/wp-content/uploads/EthereumMax-Whitepaper-v1-Final.pdf
5. Beware of Extreme Volatility
Anyone following the price of the leading cryptocurrencies is aware that prices have swung wildly in Bitcoin, Ethereum, Tether, etc., daily over the last year. Nevertheless, there is some order in the chaos of the leading currencies when compared to EMAX.
Price and trading volume are the main data points that require careful analysis.
When launched on May 14, 2021 EMAX had a transaction volume equal to $16 million and a price of $0.00000005875. On May 27, 2021, after a post by Paul Pierce and news about a partnership with Floyd Mayweather surfaced, trading volume spiked to $107.7 million, a mere 13 days after EMAX’s launch.
By May 30, 2021, EMAX reached a price of $0.000000863 an increase of over 1000% from the launch price. By August 1, 2021, the transaction volume fell to a stunning $157,423 after the price had already crashed on July 15, 2021 to $0.000000017. In summary, EMAX rose and crashed in 2 months.
For a comparison, the price of Ether has grown from about $122 in February 2020 to over $3,000 in February 2022 reaching as high as $4,865.
For more information, please contact:
Kresimir Peharda, Partner