Hedge Funds Flip ICOs, Leaving Other Investors Holding the Bag(bloomberg.com)
bloomberg.com
Hedge Funds Flip ICOs, Leaving Other Investors Holding the Bag
https://www.bloomberg.com/news/articles/2017-10-03/hedge-funds-flip-icos-leaving-other-investors-holding-the-bag
56 comments
A huge proportion of the ICOs I investigate turn out to be pure facade. It's amazing to me just how quickly this con was honed and formalized, but I guess people have always been good at aping when it comes to get-rich-quick bandwagons.
The standard ICO consists solely of: 1) A slick website. 2) A well-produced video. 3) A whitepaper that discusses trivially standard blockchain features and goals. No differentiation necessary. 4) The appearance that prominent or well-credentialed people are working on the "technology".
That's all. The "product" is vapor. The real product is another pump & dump vehicle to satisfy the insatiable demand for pump & dump vehicles. This product is sold to the "investors" during the ICO. Said "investors" are even explicitly awarded more coins for shilling the pump everywhere by creating amateurish articles and YouTube videos.
The standard ICO consists solely of: 1) A slick website. 2) A well-produced video. 3) A whitepaper that discusses trivially standard blockchain features and goals. No differentiation necessary. 4) The appearance that prominent or well-credentialed people are working on the "technology".
That's all. The "product" is vapor. The real product is another pump & dump vehicle to satisfy the insatiable demand for pump & dump vehicles. This product is sold to the "investors" during the ICO. Said "investors" are even explicitly awarded more coins for shilling the pump everywhere by creating amateurish articles and YouTube videos.
The brilliant part of it is that it's a double pyramid scheme. The people buying into these ICOs are doing so with Bitcoin or Ethereum that has often appreciated 100x or 1000x from when they bought it. So a company may raise $200M in an ICO, but the investors may've only paid $200K for their Ethereum in the first place. The huge dollar amounts attract more people into the ecosystem, which drives the price of your base cryptocurrencies higher, which means that the prices of these new ICO tokens are even cheaper relative to the dollar amounts paid in the first place, which encourages people to drop exorbitant amounts willy-nilly on ICOs, which attracts even more publicity, and so on.
Until one of two things happens: there are no more buyers for cryptocurrency, the price crashes, and all these ICO investors lose their shirts; or all money enters the cryptocurrency ecosystem, entrepreneurs develop new products & services that can only be bought with their proprietary ICO tokens, Ethereum replaces the dollar as the world reserve currency, and the dollar crashes. I would bet on the former being much more likely than the latter in terms of probabilities, but given that the outcome of the latter is that all savings of people who don't invest in cryptocurrencies are worthless, that fear may be driving a lot of the ICO speculation.
Until one of two things happens: there are no more buyers for cryptocurrency, the price crashes, and all these ICO investors lose their shirts; or all money enters the cryptocurrency ecosystem, entrepreneurs develop new products & services that can only be bought with their proprietary ICO tokens, Ethereum replaces the dollar as the world reserve currency, and the dollar crashes. I would bet on the former being much more likely than the latter in terms of probabilities, but given that the outcome of the latter is that all savings of people who don't invest in cryptocurrencies are worthless, that fear may be driving a lot of the ICO speculation.
>all savings of people who don't invest in cryptocurrencies are worthless, that fear may be driving a lot of the ICO speculation.
There are lots of ways to invest your money that aren't based on the dollar. Futures, real estate, company stocks, metals.
There are lots of ways to invest your money that aren't based on the dollar. Futures, real estate, company stocks, metals.
Sure, and they'll hold their value even in this scenario. But (other than the hedge funds) I suspect many people investing in these ICOs aren't big investors in those, and even among those that are, I doubt they'd like to see their checking account become worthless.
I even seen a designer specialized in creating beautiful ICO websites :)
What % of ICOs are seemingly legitimate? I see advertisements for ICOs on reddit and other tech websites all the time, and I have yet to find one that doesn't look incredibly shady.
Not many of them! Even the ones that are sincere, often have terrible ideas. Or purely unworkable ideas or no business model.
It makes it hard for legit people like my startup. We're actually using tech for an end case, not building tech on top of tech for tech's sake.
It makes it hard for legit people like my startup. We're actually using tech for an end case, not building tech on top of tech for tech's sake.
The legitimate ones happened years ago and have survived, they wouldn't be called ico's anymore.
Invested in one that raised just over $1m, it was considered a huge amount at the time, they had a solid team, serious whitepaper and a rough alpha open sourced product that you could load up and use. A small team that struggled with limited funds and still going strong long down the track.
Today whitepapers have little scientific merit and are more brochures. These companies are raising 100's of millions with no product whatsoever.
Only time can tell legitimacy, and unless you have both the technical and economic ability to properly assess these offerings the best advice is to stay far away until a viable alpha product is created.
Anecdotal experience is that >95% of ico investors haven't even tried the product they have invested in. Seen people who spend hours a day on the forums spruiking yet can't even point to the binary download page when asked.
Invested in one that raised just over $1m, it was considered a huge amount at the time, they had a solid team, serious whitepaper and a rough alpha open sourced product that you could load up and use. A small team that struggled with limited funds and still going strong long down the track.
Today whitepapers have little scientific merit and are more brochures. These companies are raising 100's of millions with no product whatsoever.
Only time can tell legitimacy, and unless you have both the technical and economic ability to properly assess these offerings the best advice is to stay far away until a viable alpha product is created.
Anecdotal experience is that >95% of ico investors haven't even tried the product they have invested in. Seen people who spend hours a day on the forums spruiking yet can't even point to the binary download page when asked.
This. You hit the nail on the head.
It's hardly textbook: previous investors are not being directly paid from incoming funds.
You're referring to a ponzi scheme. ICOs aren't ponzi schemes, but most of them are pump-and-dump schemes.
You mean to tell me that investors don't actually want their digital Beanie Babies and are trying to pitch them to suckers after getting them cheap to make money? Colour me shocked.
It's like nobody learned anything from the early 2000s.
It's like nobody learned anything from the early 2000s.
I don't think they forgot the lessons. Its just that the allure of quick money is just too great for many people. I think this might be why a lot of people get addicted to gambling, for instance.
In this case, I think most people are aware its a bubble/ponzi scheme and are trying to "beat it" by making the most profit and getting out ASAP before the bust.
In this case, I think most people are aware its a bubble/ponzi scheme and are trying to "beat it" by making the most profit and getting out ASAP before the bust.
It's a shame that cryptocurrency/tokens are being abused in this way - they're an interesting technology with a lot of good use cases, but after enough ICO instances where people get burned I'm concerned there's gonna be a huge aversion to them by the general public.
I keep hearing this. Can you give an example of a non-contrived use case that the world currently (1) needs and (2) lacks adequate solutions for as is?
Was an iPhone ever needed as an adequate solution to some problem?
BlackBerries not being all that good was a problem in search for a solution.
You know, the BlackBerry? That smartphone that did everything that an iPhone could do, just a bit worse?
Steve Jobs didn't exactly envision the iPhone wholesale, on the seventh day of Genesis.
You know, the BlackBerry? That smartphone that did everything that an iPhone could do, just a bit worse?
Steve Jobs didn't exactly envision the iPhone wholesale, on the seventh day of Genesis.
Anonymous currencies. Dash, monero, zcash.
Feeless transactions. IOTA
Fog/Mist computing. SNM, Golem
Decentralized marketplaces. Many, syscoin is my favorite.
Identity tracking for IOT. Centralized solutions might exist, but WTC and the like are interesting.
Decentralized governance. DASH, Lisk, more
Feeless transactions. IOTA
Fog/Mist computing. SNM, Golem
Decentralized marketplaces. Many, syscoin is my favorite.
Identity tracking for IOT. Centralized solutions might exist, but WTC and the like are interesting.
Decentralized governance. DASH, Lisk, more
World computer - Ethereum, NEO, EOS, Waves, many more
Banking the unbankable - Airfox, VVToken, likely others
More efficient advertisement - BAT, AdEx
Paying content creators - Steem
Distributed file storage - FileCoin, MaidSafe, Storj
Uncensorable internet - zencash
BTC gets all the press for first mover advantage, but is really the worst of the bunch.
This is not investment advice. It is quite exciting, however.
Banking the unbankable - Airfox, VVToken, likely others
More efficient advertisement - BAT, AdEx
Paying content creators - Steem
Distributed file storage - FileCoin, MaidSafe, Storj
Uncensorable internet - zencash
BTC gets all the press for first mover advantage, but is really the worst of the bunch.
This is not investment advice. It is quite exciting, however.
People that speak gloom and doom don't realize how many cryptocurrencies have already crashed and burned (from an investment standpoint). This market is absolutely ruthless, and any investor doubt is quickly seen in the market.
Examples (Percent down from peak) BitShares - 80% SiaCoin - 60% Factom - 40% Numeraire - 90% Monaco - 65%
The list goes on. So for everyone who says this bubble is going to pop, I disagree. Bubbles pop every day in the crypto markets because there is absolutely no market more efficient than cryptocurrency. The strongest coins always win out in the end
Examples (Percent down from peak) BitShares - 80% SiaCoin - 60% Factom - 40% Numeraire - 90% Monaco - 65%
The list goes on. So for everyone who says this bubble is going to pop, I disagree. Bubbles pop every day in the crypto markets because there is absolutely no market more efficient than cryptocurrency. The strongest coins always win out in the end
I am pretty sure a sizable chunk of current digicash "investors" were not even born in 2000. And we know there's one born every minute too..
The (significant) downside of limiting early investment to accredited investors is that the early investors are the ones who gain the most profits. They're also the ones who take the most risk of losing the most. People seem to want low-risk high-reward investments and that demanding the appropriate laws will give it to them.
The thing that ICOs seem to have not caught onto yet is that early investors are mostly in it for the flip, as evidenced by so many ICOs quickly dropping below ICO price. This is easily solved by restricting delivery of the tokens to a company-benefiting schedule. The difficult decision will be balancing the imposed illiquidity with attracting enough initial capital to be viewed as attractive to later investors.
The thing that ICOs seem to have not caught onto yet is that early investors are mostly in it for the flip, as evidenced by so many ICOs quickly dropping below ICO price. This is easily solved by restricting delivery of the tokens to a company-benefiting schedule. The difficult decision will be balancing the imposed illiquidity with attracting enough initial capital to be viewed as attractive to later investors.
These ICO shenanigans remind me of that saying from poker, which is something like "if you're looking around the table and you don't know who the sucker is, it's you".
I liquidated all of my ether today. While I appreciate the potential of the technology, in my own opinion it is just too susceptible to market manipulations currently and there is too much uncertainty. I could be wrong but I am comfortable with that.
I will reinvest the profits in a vanguard fund where at least I know the 1000 pound gorilla manipulating the market is on my side. Kind of...
To those staying in, I wish you nothing but success.
I will reinvest the profits in a vanguard fund where at least I know the 1000 pound gorilla manipulating the market is on my side. Kind of...
To those staying in, I wish you nothing but success.
may I ask why you liquidated, especially with PoS approaching?
Warning: article plays audio on open, on mobile. I opened the link on my phone (in an office) and was startled by a loud man speaking.
Edit: The Kik coin makes me ask if coins are the new gift card. Instead of paying a business $50 to get a card worth $50 of merchandise in the future - are we just going to buy $50 worth of RetailerCoin?
Edit: The Kik coin makes me ask if coins are the new gift card. Instead of paying a business $50 to get a card worth $50 of merchandise in the future - are we just going to buy $50 worth of RetailerCoin?
Hedge Funds exist for one reason and one reason alone, to make money. Of course, they like early investment in the ICO's. But what's frightening is that the retail investors don't see the very obvious thing.
You can't expect SEC to rally every time, individual investor education I guess is more important so people won't lose their hard earned money.
You can't expect SEC to rally every time, individual investor education I guess is more important so people won't lose their hard earned money.
> You can't expect SEC to rally every time
Can you expect them to rally any time, given 2008?
Can you expect them to rally any time, given 2008?
The SEC prosecutes a huge number of securities frauds.[1]
[1] https://www.sec.gov/litigation/litreleases.shtml
[1] https://www.sec.gov/litigation/litreleases.shtml
Haha. How is this different from last tech bubble high of 2000 where folks were "daytrading" quickly appreciating tech stocks or last real estate cycle high where "everyone" was in and out flipping homes. I say its not any different! Here you have hedgies using early access advantage to buy at a discount and quickly turn around and sell to the "bag holders". (aka retail "know-it-all" bag holders).
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Cryptocurrency is now to the point where Wall Street is noticing that it is a thing people are willing to assign a value to, despite it generally not having any obvious inherent value.
Be careful: Wall Street is really good at extracting this value, and leaving everyone else involved with empty pockets.
How can a cryptocurrency defend against this? Should it? Should it embrace this instead, in hopes of riding these cycles long enough to look like a legitimate Store Of Value? Which one would be better for the theoretical long-term goal of replacing existing currencies with cryptocurrency?
(Not that I am saying every ICO is floated by angels with only the most perfect selfless interest in cryptocurrency; decide for yourself what percentage of the people doing this are running a scam.)
Be careful: Wall Street is really good at extracting this value, and leaving everyone else involved with empty pockets.
How can a cryptocurrency defend against this? Should it? Should it embrace this instead, in hopes of riding these cycles long enough to look like a legitimate Store Of Value? Which one would be better for the theoretical long-term goal of replacing existing currencies with cryptocurrency?
(Not that I am saying every ICO is floated by angels with only the most perfect selfless interest in cryptocurrency; decide for yourself what percentage of the people doing this are running a scam.)
Early retail investors in ICOs are not going to be very happy with returns down the line I don't think...meanwhile, hedge funds thrive anywhere there is volatility, and crypto is nothing but volatile.
I had one of our investors write us and say he was really counting on our success to pay some family bills. I told him he should back out, that no investment is a good idea for bills. Much less a startup! Much less an illegally operating startup that depends on cryptocurrency! I'm sure of our model, but damn.
Ok, raise your hand if you didn't see this one coming.
Aren't they taking on somewhat more risk by contributing large sums of money earlier on? I kind of think the discount is acceptable, but there should be stronger terms around the ability to flip it immediately.
You're right to some degree but not entirely, because of how early cryptoeconomics are in their stage.
When people pump money into a currency, they're not just "taking risks", but also using their authority in the community to generate hype, which brings in uneducated and uninformed people into the equation.
If you look around the Internet you quickly realize how "uneducated and uninformed" most of these investors are.
This is different from traditional family/friends => Angel => VC => public model because the public is protected from making any foolish investments until the org shows tangible traction.
So TLDR: they're taking risks, so at the same time they try to minimize their risks. This is why they exit very quickly. This isn't possible with traditional investment model where your money is locked in until an IPO or an M&A, which is why it is unfair to say these people are "taking risks". They have the ability to manipulate their risk and that makes a lot of difference.
When people pump money into a currency, they're not just "taking risks", but also using their authority in the community to generate hype, which brings in uneducated and uninformed people into the equation.
If you look around the Internet you quickly realize how "uneducated and uninformed" most of these investors are.
This is different from traditional family/friends => Angel => VC => public model because the public is protected from making any foolish investments until the org shows tangible traction.
So TLDR: they're taking risks, so at the same time they try to minimize their risks. This is why they exit very quickly. This isn't possible with traditional investment model where your money is locked in until an IPO or an M&A, which is why it is unfair to say these people are "taking risks". They have the ability to manipulate their risk and that makes a lot of difference.
Yeah, I don't see it as "holding the bag". People are greedy and are now sad they can't find anyone to buy their pyramid scheme tokens.
If these ICOs are now requiring accredited investors, why does there not seem to be the same level of SEC scrutiny that any normal hedge fund must have?
If these ICOs are now requiring accredited investors, why does there not seem to be the same level of SEC scrutiny that any normal hedge fund must have?
Getting in a few weeks earlier on a multi-year project doesn't seem like much additional risk.
In the same way, it would make perfect sense for Hedge Funds to invest early, or even start actual pyramid schemes, yet we've prevented that. Junk like this is not healthy for the market.
Ironic. Crypto currency was supported to be the equalizer, not enabler of incumbents
ICOs, cryptocurrencies, highly speculative assets are a high risk gamble, hard to tell which one will succeed, if it was easy we'll all be rich, only way to win is by using the information you have available and only invest what you can afford to lose
A document describing the precise process used to acquire ICO shares, which I plan to automate https://medium.com/@simonwintersf/the-worlds-most-simple-gui...
It's all a lie. All a big lie.
catches head and laughs maniacally
catches head and laughs maniacally
This is hilarious; the hedge funds are scamming the scammers.
This should be a huge red flag. If a business is spending the majority of the money from early investors to find more investors, rather than actually developing and marketing their product, that's pretty much a text book pyramid scheme.