New digital currency sees 2,000% price rise in a week

Suddenly the world’s 3rd-most-popular digital currency, Steem is raising scam alerts for some observers
A new digital coin is polarizing the cryptocurrency community after a massive price run-up stoked speculation that it could be a pump and dump.

The coin, called Steem, surged 20 fold in value in the past week, from around 25 cents a coin on July 8 to around $5 on Wednesday. It quickly established itself as the world’s third-largest cryptocurrency, behind Bitcoin BTCUSD+3.54% and Ethereum.

In the span of less than a week, Steem has gone from the 10th largest cryptocurrency by market capitalization to crack the top three, surpassing Ripple and Litecoin, which have experienced their own boom-and-bust cycles.

Cryptocurrencies are notoriously volatile. It’s not uncommon to see investors pile in to a new digital currency, hoping to ride a speculative wave to a quick profit. Often, the gains are unwound just as quickly, as buyers rush for the exits.

Ethereum, the second-largest cryptocurrency, saw its value increase from about 50 cents a coin last summer to a peak north of $20 a coin in June, before tumbling back to $12 a coin.

But Steem stands out because of the pace and magnitude of its rise, and for its unique business model.

Steem’s creators designed the digital currency to be a part of a social-media platform, called Steemit, that rewards users who publish content based on its popularity. Its founders say Steemit will attract users by rewarding them for behaviors that other social media companies, like Reddit and Facebook, use.

Steem’s creators tout it as a revolutionary social-media platform that subverts the business model of Facebook and Reddit, allowing its users to profit from the content they create.

“People should be getting paid for the work they do. People are showing up for free and putting countless hours of their time into these platforms that make money from them,” said Ned Scott, one of the creators of Steem.

Users who publish posts on Steemit, which loosely resembles Reddit, are rewarded with Steem tokens. The more popular the post, the larger the reward. Users who recommend content are rewarded, too, depending on the content’s popularity.

But the cryptocurrency also trades on the secondary market, where speculators have appeared eager to drive up its price. A single Steem token was worth about $4 Friday, according to Coinmarketcap.com. Its value briefly dipped after Scott announced that the platform had been hacked late Thursday.

Critics say Steemit’s business model is, at best, convoluted, and at worst, nonsensical.

In a Reddit thread, users debated whether Steem was the first step in a social-media revolution, or a scam.

Some have raised concerns about the amount of Steem that’s controlled by Scott and his cofounders, equal to about 50% of the total float. Steem had a market capitalization of about $330 million on Friday.

“I don’t know why it has value,” said Tone Vays, head of research at BraveNewCoin, a company that provides data and analytics about the cryptocurrency market. “It just goes to show how you stick the words ‘New Crypto’ in front of something and speculators just come running.”

Both Scott and Steemit co-creator Daniel Larimar have been involved in the cryptocurrency community for several years. Larimar previously worked on another cryptocurrency called BitShares, which saw its market cap peak above $60 million in late 2014 before its value collapsed.

Steemit’s founders pushed back against fears that it could be a pump and dump, saying they’ve built certain features into the platform to encourage users to hold on to their coins. One such feature, called Steem Power, rewards users who agree to hold on to their coins by granting them enhanced influence and promotion powers.

“The Steemit team is extremely proud of what we’ve accomplished and excited about what we’re building.