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When ICOs Fail


Edit: half way through writing this article China announced that they have made ICOs illegal.

I’ve been long avoiding this article, waiting until the inevitable ICO shitstorm began to show its first signs of pouring. But when Paris Hilton tweeted yesterday that she was participating in an upcoming ICO, I decided it was time to throw my hat in the ring.

When a single token sale can yield investors an 8,000% return, it is very hard to lose. When investors struggle to lose money, they become cognitively dissonant; rationalizing their million dollar gains with their phenomenal asset-selection process whilst ignoring the wall-to-wall bull market in which they invest. The market is in trouble, and things may get a lot worse – sooner – if the SEC and Chinese regulators make a widely anticipated move.

For those not familiar with an “Initial Coin Offering”, new platforms raise funds (in the form of cryptocurrencies which are then sold for fiat) by issuing tokens to participating investors. Investors buy said tokens with the expectation that the price of the token will rise, and that they can sell their tokens at a future date for profit. This type of investment is classed as a Security by the Securities Exchange Commission in the USA, and those issuing these securities are required to follow strict rules. Unsurprisingly, in the wild west of globally accessible ICOs, those rules are either knowingly or unknowingly ignored.

A combination of stricter regulation as well as fundamentally useless tokens (fun fact: the “Useless Ethereum Token” raised $80K. It is literally useless) will eventually result in a massacre. Here are some obscene market caps from the time of writing:

  • OmiseGO ($1B): token for diverse payment solutions
  • EOS ($401M): token for a new blockchain
  • TenX ($360M): token for cryptocurrency card payments
  • Gnosis ($184M): token for a prediction market platform

These platforms typically have less than 10 staff and are very much in the seed phase. Keen eyed investors may also be able to spot the similarity across these various platforms; their product doesn’t yet exist. Whilst these platforms have the potential to be revolutionary and may go on to become the behemoths of a blockchain-led future, their current valuations are way out of whack. The trend continues down a long list of ICOs at various scales. If a $500M platform can have no product, you can only imagine what many $30M platforms hold in store for their lucky investors. But in the blockchain space, $30M is chump change, maybe it’ll be $60M next week and Mr or Mrs investor can buy their next Lambo.

When ICOs fail – and it is looking very much like they will – investors that pumped their coin with all of 10 minutes due diligence will be hit with the realisation that no one wants to hold a token that enables “secure marijuana payments” or “bitcoin-like transactions”. The sell-off will be huge, with legitimate and fundamentally valuable cryptoassets being caught in the panic. We can only hope that the damage does not incite the heavy handed regulation that the technology space has seen before, and that the failing and flawed ICOs that Ethereum enabled do not damage Ethereum itself.

Bitcoin is looking more like a safe haven asset than ever… Until it forks again in November of course. On second thought, maybe it’s time for dollars.

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Nick Founder