Many ICOs are made with the intention of circumventing formal rules on capital formation. A new form of wealth creation sprung up. Despite decentralization being the theme, wealth creation was centralized in other ways vis-à-vis with those who have a superior understanding of the technology or financial leverage to build an ICO project. This, as well as other factors, have influenced the valuation of ICOs and the history of bubbles in the ICO space.
The ICO crash of 2018 should be a reminder of the dangers of dealing in business with individuals who we don’t really know. VPNs helped many individuals behind ICOs to conceal their activities. Fake profiles were made to show seemingly “qualified” teams.
Penny Stocks and ICOs
Many individuals would be too dazzled by talk of shiny new “decentralized” technology to realize many ICO “projects” were simply ideas and whitepaper. Already established companies would jump in to take a slice of the pie. Those potential investors who did look past the ideas and white papers could easily be sucked into such projects on account on the apparent authenticity, even though a look at the “established” company would show it was illiquid.
In many senses, ICOs have exhibited similar traits to penny stocks. After the 1929 stock market crash, legal frameworks were put in place. The Securities Exchange Act of 1934 served as one of such measures. Laws prohibited penny stocks from being place in papers among other restrictions. In the same vein, laws will and can prevent the public from falling for fraudulent ICOs. However, as history has shown, fraud arises regardless of restrictions.
Similar complaints of pump and dump schemes were common in the dot com era. Telemarketers promoted stocks to investors who lacked the understanding to make risk-conscious decisions. Like ICO’s many of these companies didn’t file quarterly reports with the Securities and Exchange Commission (SEC) or other regulatory bodies. It doesn’t take much effort to appoint an independent body (or even an individual) to carry out audits of the company. Many ICOs have failed to do this. It may be understandable considering they are after all considered startups but the level of fraud that takes place in the same should be enough to nudge many of the seemingly proactive ICO teams to set themselves apart from others.
History Repeats Itself?
As Haseeb Qureshi points out, “ICOs, just as penny stocks, are a two-sided market. Speculators don’t care about the technology, they just want tickers to bet on and get rich. Fraudsters don’t care either, they just want tickers to manipulate and get rich. Everyone gets what they need, the market bustles with activity, and everyone makes money — until they don’t.”
Bad actors and speculators were quick to zoom in on ICO projects due to the unendurable nature of it. This shouldn’t be a reason to paint the whole space red. Many facets of humanity’s hand-made work is faulty in some way. But it is also a beautiful. Regulation won’t necessarily bring brighter days. It will simply bring control into the hands of governments who, depending on one’s agreeability to their policies, will be villains as well as heroes.