Guides to ICO’s
The problems with ICOs in 2018, and how not to get caught out
Cryptocurrencies and Blockchain platforms, starting with Bitcoin, have promised transformation on an epic scale- of finance, how money is sent, store of value, allowing for the creation of smart contracts, and all the many use cases of blockchain. However, whilst many of the newer cryptocurrencies and blockchains have added revolutionary new capabilities to the space, many more new ICOs have been created recently, bringing no value but only a copy of existing platforms, or worse, bringing an idea that is not truly a cryptocurrency or using blockchain in any way, but designed purely as a get rich quick scheme for the founders.
As crypto has gone more mainstream, there have been several issues come up, which have taken some aspects of the crypto space away from its primary intended use case – decentralised encrypted digital currency, into centralised money-maker for few individuals.
In early 2017, there were few enough ICOs, that it was still possible to look closely at those ICOs, read the whitepapers, research the team and product or concept, and make a more or less informed decision about investing, or not. Some of the earlier ICOs lost investors money, and some were scams- the most notorious of these is probably Bitconnect, which folded as a confirmed Ponzi in late 2017, but there were also some legitimate projects amongst the early (pre Summer 2017) ICOs, which gave huge returns on investment.
Problem 1: Too many ICOs
There are now simply too many ICOs. Before 2017, there were few enough ICOs, that it was possible to analyse all ICOs to find the ones with the most potential. They also largely tended to be serious, with real use cases, and the proportion that were scams or would fail was much lower.
Problem 2: Too easy to create an ICO
When crypto fever hit mainstream in Summer 2017, thousands of companies started launching ICOs to take advantage of the money pouring into crypto. Most of these seem to serve as get rich quick schemes for the founders. It was clear to see, that anyone could put up a website, get a whitepaper written and some code copied, and make millions from launching an ICO, with no real need to follow through after that. Many individuals and start-up companies, with no previous experience in crypto or blockchain, started advertising ICOs that they had just created out of thin air, in months, or even weeks, with no real product.
The problem is, anyone without any experience, can now create an ICO, quickly and cheaply, and because of the hype in the market, there is often no need for that ICO to provide any value or use case providing it is well marketed. ICOs are being created left, right and centre to take advantage of the current bubble-like hype around crypto.
It is now very easy to launch an ICO. Anyone can create a website, pay a dev to copy an opensource code to create a cryptocurrency – such as an ERC20 token for example – and pay to be listed on ICO listing sites. Even though adverts for ICOs are now largely banned on Google, Facebook and Twitter, ICOs are still heavily ‘shilled’ by crypto youtubers, as well as by scammers pretending to be famous crypto youtubers, who receive money, or tokens, in exchange for talking about and promoting the ICO on social media. Most ICO founders don’t even seem to know what blockchain is, and many don’t even write a whitepaper – some just leave that out altogether, and some have even copied parts of existing whitepapers of legitimate ICOs. Many of these ICOs purely make unrealistic claims, with some claiming to be the next Bitcoin or next get rich quick scheme.
Problem 3: Lack of regulation
So long as the crypto and ICO space is not fully regulated, and there are people wanting to get rich quick, and to repeat the financial successes of early investors, there will continue to be scam ICOs, serving no purpose other than to part investors from their money.
Problem 4: Uncertainties around regulation
The SEC, and several key crypto countries, including China, have cracked down on cryptos and added fear and uncertainty to the market. Regulation has led some ICOs to cancel their ICO, and to sell onto to accredited or institutional investors in a private pre-sale. This means that huge quantities of tokens are sold off to limited parties, often with heavy bonuses or discounts, and means that tokens might be locked up for longer, or be mass-dumped when they become tradable. Selling large quantities of tokens to any investors could result in manipulation of those markets by whale (large scale) holders.
Problem 5: Tokens controlled by institutional speculators, not users
Due to regulatory pressure, as well as large pre-sale offers from institutional-scale investors, many ICOs sell their tokens to a small number of investors, who are happy to hold tokens and thus reduce liquidity, or more likely, manipulate the markets based on their speculations. This means that the value of tokens may be distorted, and means tokens are less likely to be used by the intended users, which might be detrimental to the success of the platforms.
Problem 6: No transparency
Many ICOs do not live up to their whitepaper, and some ICOs even take their whitepapers down, or close their websites, when it becomes apparent that they haven’t met the over-ambitious targets they set. There are no real regulations in place to ensure that ICOs are held accountable to the roadmaps or information they promise to their investors. Many ICOs make false or impossibly optimistic promises, or future projections of their tokens’ anticipated worth, which are wildly hopeful at best, and scams at worst.
Problem 7: Risks to Investors
The SEC and some Governments are seemingly taking regulations too far, and are threatening and punishing even some investors. This is going to put a lot of fear into the market, especially coupled with the regulatory and fiscal (tax) uncertainties. Furthermore, regulation might shut down some ICOs who might have lived up to the promises made to investors, but haven’t complied 100% with SEC or other regulations. By shutting down these ICOs, or sending subpoenas to their founders and delaying their ability to trade, this will cause investors to lose their investments.
Problem 8: Scams
ICOs are now seen as an easy way to make money, both by the founders, but also by many scammers who know how to hack into the ICOs channels to steal their funds or investments, and trick their investors. Many scammers prey on ICOs and on naïve investors in the hope of diverting funds to themselves instead of to the ICO, by giving out false contribution addresses and creating scam websites and social media channels. Others just hack the funds directly from the ICOs. The level of scams targeting crypto investors is only increasing.
Unknown Scary Facts about ICOs – Things ICOs would probably rather you didn’t know.
1. 93% of ICOs don’t ever hit exchanges.
That means, for 93% of ICOs, you will probably never see your money back, unless the ICO has a buyback agreement, at full purchase price. This is a) rare and b) unlikely to be honoured/ or c) will have clauses or limitations on the offer that make it unlikely for you to be able to actually get your money back.
Any claims made by an ICO stating that their tokens will be trading on top/ any exchanges by X date should at the very least be disregarded, and should make you doubt the legitimacy of anything else written in the White Paper.
Exchanges are private businesses and get to choose which ICOs they list, and which they avoid. They are still struggling to cope with the huge volumes of applicants signing up to use their exchanges, as well as being inundated with ICOs and smaller-cap cryptocurrencies trying to get listed on them. If there is a problem with a cryptocurrency down the line, the exchange is left with the admin and hassle of delisting it. This means that exchanges can be extremely selective which ICOs they accept to be listed. They also often have stringent criteria a cryptocurrency must fulfil in order to get listed – such as minimum trading volumes or conditions about the token or tech – these criteria are often simply not possible to meet until the project has been around for a while.
2. Many Advisors listed on ICOs’ websites aren’t actually advising the project
Good ICOs will go to great lengths to get relevant experts and consultants on board their project, to benefit from their experience. These projects will realise that the experts in their fields have knowledge that will benefit the ICO project in the long term.
Many ICOs, however, pay people seen to be ‘crypto experts’ to put their names, profiles and photos to a project, but don’t want their knowledge at all! They merely want to make it look like they’ve got a big team of advisors. They might offer a nominal sum, usually paid in their token (which may or may not ever hit exchanges and as such might be worthless) to include an ‘expert’s’ CV on their page purely to make themselves look accountable and credible.
Some ICOs don’t even pay their ‘advisors’. Some ICOs have put names and photos of experts and celebrities onto their websites and White Papers, without even asking their permission. There have been many cases of real experts and celebrities of the crypto world denying anything to do with ICOs who have tried to use their names.
How to recognise is an advisor is real or fake? This can be hard. Check every advisor on LinkedIn. Use a photo recognition software (such as Google’s version https://cloud.google.com/vision/) to see if their photos are of real people or are just generic stock photos etc. Check the track record of advisors if you can. Generally, if an ICO is posting a photo of Ryan Gosling as one of its advisors (has been done), it’s probably a scam.
3. Kit ICOs for a couple hundred $ dollars really do exist
There are sites (fiverr.com amongst others) where one can literally buy a done-for-you ICO. Freelancers, or opportunist companies, will write (bad) White Papers, create (basic) websites, copy some code to create your very own (unimaginative) crypto token, set you up with a Telegram group, and get you listed on a handful of ICO promotion and listing websites. This can cost as little as a few hundred dollars.
The problem with ICOs is that literally anyone with a website can launch their own ICO. Some of these even raised (spectacularly and surprisingly large) sums of money in the 2017 crypto fever.
For every crypto millionaire/ person who has done well from investing in ICOs, there are (probably many) more who have lost money
No explanation needed.
5. Not all ICOs tell the 100% truth. ‘Mistakes’ or ‘misunderstandings’ or downright fabrications have been made.
Just because it is written on their White Paper or reported elsewhere, does not mean it is true.
Some of the more dubious ICOs refer back to the ROIs made by early investors in the Bitcoin, Ethereum and other early ICOs. They might claim to be the ‘next Bitcoin’ and even claim to guarantee set returns. One ICO that did this was Plexcoin, which had people still believing it was the next best thing and defending it even after it was shut down by the SEC for being a scam.
6. Many/ Most ICOs probably don’t actually have a use for blockchain or for their own crypto token.
Blockchain is the technology of the future, and is already being incorporated by most large companies. There will be a time in the near future, probably within the next 5-10 years, when every company and every transaction will be on the blockchain as standard. However, blockchain technology is still developing and improving. There are still many use cases where a simple spreadsheet or database or CRM would do the job just as well if not better.
Many ICOs do not actually need blockchain for their projects- blockchain is just a buzzword that gives them an excuse to launch an ICO, which is seen as an easier way of raising funds than going through traditional VCs or getting a loan.
Likewise, many ICOs do not need their own crypto token. However, it would be hard for them to raise money in an ICO without having their own cryptocurrency. So they create one, to justify having an ICO and raising the funds. These cryptocurrencies are often useless, in the literal sense- i.e. they have no real life uses.