Is the saga of the Squid Game crypto a warning of what is to come?

If there are more sudden downward lurches in other cyber assets, then those lurches will increasingly be driven by tightening liquidity. As money tightens there will be distressed sellers who will dump whatever they can, writes Hamish McRae

A cryptocurrency emerged inspired by the series from South Korea (Netflix)

The collapse of the Squid Game cryptocurrency is either the canary in the mine warning of an impending catastrophe, or a classic example of the way fraud can sprout up anywhere and everywhere. Or maybe it is both.

The story is simple enough. Some people create a cryptocurrency, in this instance one inspired by the Netflix series from South Korea. Money floods in, pushing the price of one coin to $2,856 (£2,097). Then there seem to be a bar on withdrawals, whereupon the price plunges to near zero, and the developers are estimated to have made off with nearly $3.4m. The website and the social media accounts that had been promoting it have shut. Game over.

The fraud aspects first. Over the next few days we will learn much more about the details of this apparent scam. But I suspect that when we do, we will discover that this is quite a small one compared with the others that have been going on over the past months. The group SlowMist keeps a running tally of losses, and puts the investor losses from “Squid” at $12m. Compare that with losses a few days earlier from a private key leak at BXH of $139m, or $130m at Cream Finance from a flash loan attack.

These three examples, and several other smaller ones, are all in the past few days. In the past three months total losses are estimated by Atlas VPM to be more than $1bn. In the first nine months of this year there have been more attacks than in the previous three years.

In a way this is all unsurprising. Three things have come together. One is a flood of liquidity created by the world’s central banks that has to go somewhere. The second is a different sort of flood, that of inexperienced investors that can be easily seduced by the prospect of get-rich-quick schemes. And the third is the technology that has created or at least enabled the growth of new forms of electronic assets.

This combination of money, investors, and novel investments is an absolute playground for fraudsters. One of the great attractions of the cyberworld is that it is largely unregulated. That makes it an even juicier place to go and filch money off people.

This story, though miserable for those who have lost money, is in a way less important than the possibility that this is an early warning of a wider implosion of value. People have been predicting a collapse of cyber currencies for a long time – I am among them – and so far they have been very wrong.

At the moment demand for all assets is very strong. On Monday the main US equity markets were at an all-time peak, and US shares taken as a whole are much more valuable than all the assets in the crypto markets. House prices in the US, another huge market, are up some 20 per cent year-on-year. So it does not take much money to move out of equities or homes to have a disproportionate impact on the price of cryptocurrencies.

The great question is what happens when the tidal wave of liquidity starts to retreat – and none of us know the answer to that.

What we do know that the next few weeks will see central banks around the world starting to tighten policy. It is possible that the Bank of England will increase its main interest rate this week, though the US Federal Reserve will be the place to watch. On Wednesday it is expected to announce that it will end its bond-buying programme – that has been the way it is pushed cash into the system – and the markets are looking for increases in interest rates next year. The central banks will be desperate to avoid a crash, so they will move slowly, but the end of ultra-easy money will be in sight.

When that happens, common sense says that it will be the most speculative assets that will be hit first. Squid tokens would certainly rank at the top of the speculative scale, but I don’t think that crash has anything to do with the probability of the money taps being turned off. So in that sense it is fraud story, not a canary-in-the-mine one. But if there are more sudden downward lurches in other cyber assets, then those lurches will increasingly be driven by tightening liquidity. As money tightens there will be distressed sellers who will dump whatever they can.

This Squid tale shows what can happen to assets that have nothing behind them – and it is one that does not end well at all.