The recent rumours about China banning ICOs and the subsequent Bitcoin crash made me put in writing something that I’ve been thinking for a long while. The so-called Initial Coin Offerings (ICOs) as a whole are a joke, most likely a scam and definitely not a good way to make money in the long term — especially if you are not a professional investor. I also claim that ICOs are the worst thing that can happen to the crypto currency world. Thanks to the sleazebags and professional swindlers who promote them, the adoption of the blockchain and public perception of crypto currencies in general will suffer for years, if not decades ahead.
I must clarify at this point that I am not addressing a particular ICO or token sale. Although I’ve reviewed one such bullshit project (you can read my thoughts on the GigaWatt Token sale), the purpose of this post is to convince you that the entire ICO model is deeply flawed and anti-consumer. I haven’t lost money in an ICO. In other words, I am not ‘butt-hurt’. I am just appealing to your common sense.
To prove my point, I will compare the Initial Coin Offering to its direct predecessor, the Initial Public Offering (IPO). This procedure is far from new: according to Wikipedia, the first modern IPO took place in the Netherlands in 1602. By comparison, ICOs became a thing in 2014.
The Dual Purpose of an IPO
The IPO of a company is the process during which a privately owned company get listed on a stock exchange and its stock becomes publicly traded. An IPO usually serves two purposes:
- It allows substantial growth and expansion into the market once the company product or service has proven its viability on a smaller scale
- It gives founders, owners and early investors the chance to monetize their stake and get rewarded for their risk
The process of making a company public is well understood and well regulated. Before going public, a company must publish a prospectus that gives complete and fair assesment of its strengths & weaknesses, profit and expence streams, as well as near-, mid- and long-term plans and goals. All civilized countries have in place certain rules and procedures that must be followed in order to guarantee that investors are buying into a real company with a feasible model and not into a scam.
By buying into the company, investors obtain not only a right to future profits, but they can also make decisions about how the company is managed. Investors are not guaranteed profit, but they have clear and effective ways to make sure profit is achievable by steering management during shareholders meetings, and even acting to remove underperforming management.
These safeguards have not appeared by chance; all of them are a result of stricter and stricter rules adopted via common sense or legal regulation after multiple crashes, scandals and lots of wasted money throughout the history of IPOs.
The Imaginary World of an ICO
Superficially, an ICO resembles an IPO. The management of a company that prepares for an initial token offering purportedly needs to raise money to continue development of their product or service which is inevitably poised to change the world. To this end, it publishes a whitepaper which attempts to describe the organisation, its plans and future. But this is where all similarities end. A token sale or an ICO does not sell ownership into a company; the token or coin issued is good only for using the product or service provided by the company at a discount.
Token investors are not legally protected if the company owner or CEO decides to be an asshole and spend the money on booze and hookers; they cannot pressure management to fix things that are being done badly. Heck, they can’t do anything even if management pays themselves huge bonuses and then shutters the company. Owning coinst or tokens does not equal stake in the company.
Because ICOs and token sales are not regulated, nothing prevents management from painting a false picture of the company, or from promising unrealistic goals and profits. ‘Regular’ companies that manufacture physical goods or even first- and second generation IT companies (e.g. Microsoft/Apple/Google/Facebook) offer products and services that we have come to understood. IPOs are based on cutting age technologies and offer to sell us products and services that haven’t existed before.
What happens when you grab a bunch of exagerration-prone CEOs that want to become billionnaires overnight, and let them loose among unsuspecting, technically incompetent or simply naive people who dream of becoming ‘investors’ themselves? You get Gordon Gecko or The Wolf of Wall Street on steroids and without the chance to put somebody behind bars.
These Bad, Bad Chinese…!
If you want to blame the Chinese government for causing a 30% drop in the price of Bitcoin over 3 days — please don’t. The same thing happens in the USA, as well as in many other countries. ICOs are not a good investment vehicle. They are designed by clever predators to take buyers’ money while completely avoiding any responsibility. If I can draw an analogy, the situation with ICOs now resembles the 1850s Wild West. You could get mugged then on your way to the bank, and you can get mugged on your way to the token sale now (figuratively speaking, of course). But the money you will lose to some asshole who wrote a 20-page PDF file and asks you to buy $200 million worth of his imaginary tokens is going to be very real.
If you’ve come this far you may want to say that you know what you’re doing and that there is money to be made from ICOs and token sales. Sure it can. If you buy early and sell on top of the pump & dump phase, you can make a good profit. But that profit is made at the expense of the taxi driver, the construction worker or the high-school teacher who wanted to set something aside for retirement. If you are profiting from something as idiotic as the GigaWatt sale, you’re part of the problem. Please, please be a good crypto citizen and stay away from this garbage.
If you want to know why ICOs can be a terrible investment, you will find a much better written opinion opinion piece than mine titled Cryptoasset Token: A Poor Capture of Economic Value.
What are your thoughts and experiences with ICOs? Am I right to compain about them, or have I over-generalized the situation? Let me know in the comments below.