In many ways, year 2017 became the year of “crypto”. Bitcoin was the top search result in many countries, unsurprising now that it’s become mainstream. Total ICO investment, estimated by Coindesk, reached nearly $4 billion, with the vast majority raised this year. Thousands of projects raise money, and many countries attempt to regulate this brave new industry, if you could call it that. The blockchain technology has many wonderful applications that are useful in many fields, from finance and betting, to gaming and cloud storage. The possibilities that stem from the use of this technology have attracted many talented people to present their ideas and raise funds via a method that is now called ICO-Initial Coin Offering. Some ICOs made headlines when they raised hundreds of millions of dollars in Bitcoin and Ether, reaching thousands of people eager to invest and become part of the future. But, as it so often happens, not everything is going well.
The rise of Ethereum blockchain has fueled the rise of ICOs. Ethereum, Bitcoin’s main competition, was invented by Vitalik Butyrin, a brilliant student from Canada who made blockchain technology more accessible. Whereas prior to Ether m companies and individuals looking to create a cryptocurrency had to create code from scratch, or copy an existing one, Ethereum allowed for the creation of so-called “tokens”, coins that could be used for a variety of applications and existing within Ethereum blockchain. The relative ease with which these tokens could be create spurned a frenzy of excited activity within the community, with people racing to create the most useful token and seek crowdfunding from interested investors and project fans, undergoing and ICO. Coupled with the excitement from the incredible ROI, these ICOs raised enormous sums. The entirely unregulated field and the vast opportunity for speculation has attracted many scammers, both from the project and investors sides.
Creating a project is remarkably easy when compared to creating a new product or program. There is this amazing article on Steemit(incidentally, a reasonably successful blockchain project using tokens as means of payment for articles and blog posts) https://steemit.com/scam/@moonjelly/how-to-create-an-ico-scam-in-5-simple-steps that walks the reader through the hypothetical creation of a cryptocurrency project designed to scam the unsuspecting audience. The article is not a guide to action, nor should it be considered as such. After all, based on the data from ico-list.co, about a third of ICO projects are ultimately scams.
Another issue with ICOs is the issue of hacking. Many cryptocurrency enthusiasts are capable around code and some use it for nefarious purposes. Some of the methods they use include hacking the website and changing the wallet details, diverting millions from the intended destinations. In other situations, the wallets themselves are infiltrated and funds stolen. There are numerous protections within the blockchain, but it is not without its faults.
That is not to say that all ICOs are inherently designed to fool people into investment and are dangerous. Any investment, especially early-stage is risky, and perhaps doubly so with ICO. Most of the projects raising through ICO either have an idea but not a product, or have previous experience but not a product. Tokens are meant to become the tools for the function of the product or service, usually as the means of transaction within the product/service blockchain. However, the hype around ICOs attract many scoundrels looking to speculate on the next big thing, and invest, raising the value of the coin and later dumping once reaching a certain threshold. If that sounds familiar, that’s because it is. A similar tactic is used by speculators with penny stock fraud, and the line between tokens and penny stock is less pronounced than many would care to admit.
Of course, projects and founders and communities do try to take precautions against fraudulent behavior. Some restrict the number of tokens available for sale, others keep more in the reserve. All great notions, but if too many project start going belly up, then the potential investor will look for other venues and that would be devastating for the fledging industry. Some, like Vitalik himself, attempted to formulate some rules for discerning good ICOs from bad ones, but for the most part, they are common sense instruction familiar to investors involved in regular early-stage investment or even basic trades. The main issue with ICOs, for all the comparison with IPOs is that they are conventional investing vehicles, on steroids. Successful IPOs can raise millions in the span of minutes, and reach exchanges within days after launch, all of it before the product/service is operational. Such velocity and impressive ROI that can be achieved in months, rather than years, as is the case with conventional venture investments, is undoubtedly appealing to both regular investors and speculators looking to make a quick profit.
The latest problem plaguing the ICO is the incessant regulation from the government agencies that are increasingly stricter with the unregulated field, which was unavoidable considering the scale. Some countries, like China, ban ICOs entirely, while other, like the U.S. take a more calculating approach, classifying certain ICOs as securities and others as “grey area”. SEC is expected to step up its operations in the cryptocurrency world, taking a larger role in regulating ICOs and token sales and offerings. Currently, you cannot technically offer tokens to US citizens but in the anonymous world of crypto, who can check? The rising legal costs and the lack of clear guidance from the agencies that attempt to regulate the new unknown using old methods will push the projects raising money through ICO to adopt a new approach. After the original SEC announcement in the Summer of 2017, the number of ICOs “unexpectedly” dried up. There have been attempts at new approaches, lately with Coinlist(AngelList’s subsidiary) and Microventures Crypto(Indiegogo’s crowdfunding platform), but only time will tell how this approach will fair.
Perhaps the most important problem for the founders and project, even successful ones, is liquidation. Contrary to a popular belief, turning Bitcoin or Ether into fiat is not an easy task. Bitcoin is not a universally adopted payment system, even with recent development, as it is clunky and unsuitable for quick, seamless transaction that are values in the real world. The simplest method would be to sell them on the exchange, but all that are based in the U.S. provide information to IRS(which means leaving a large share of the raised funds with the government), China banned its exchanges, smaller exchanges will not allow a significant transaction to take place, and the relative unknowns that would are not trustworthy. This impedes project development, and one of the likely scenarios is that several prominent projects will be unable to complete the project, being unable to liquidate the funds and for other reasons.
Investors, too, face this problem. You might be worth millions on the exchange, but if cashing out is not an option, then all of that wealth is practically worthless. Another problem is that for all the millions given, investors are not actually investors in the company—they are market traders, as they hold tokens that are to be used for project purposes and not company shares as they would is an equity crowdfunding campaign. There is still money to be made, for certain, but it would not be dependent on the company’s success, only the belief that the project will be successful.
For all its pitfalls and mounting legal issues, ICOs, and cryptocurrencies, are here to stay. More and more companies are considering ICO as a legitimate venue for fundraising as opposed to venture capital, or even seed or angel investments. And for some, it might a reasonable option. Naturally, some companies began to force a token application for their product or service, but some offer unique takes, concepts and ideas that are refreshing and can have valuable applications. On such area is competitive gaming, or eSports. In a rapidly developing industry, blockchain technology offers incentives to players and provides transparency. And that is only one example—there are enormous benefits for using blockchain in many fields and for various applications.
Already, there is talk of formulating a “ICO 2.0”, an investment vehicle that will not have many of the pitfalls that ICO of today have. It would certainly be a welcome development, as there are exceptional ideas, like the American Bitcoin, that need financing, and ICOs can provide the necessary catalyst for these projects to succeed. But unfortunately, fraudulent projects are washing out the legitimate ones. And for now, ICOs are nowhere near secure or potentially profitable as investing in early-stage company on Regulation CF websites.
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