Bitcoin falls 20% as Mobius and Chinese regulators warn
Cryptocurrencies are beginning to get out of control warns respected investor Mark Mobius
Mobius believes governments will begin to clamp down on cryptocurrencies sparking rush to gold
Yesterday China’s PBOC ruled Initial Coin Offerings (ICOs) are illegal and all related activity to halt
China is home to majority of bitcoin miners
Paris Hilton latest celebrity to support an ICO
Gold’s return of 16% YTD look ‘dull’ or ‘stable’?
Bitcoin fell 23%, now down 16% from $5,000 high
Editor: Mark O’Byrne
Bitcoin in USD 1 Year (Coindesk)
An ICO unregulated issuances of cryptocoins where investors can raise money in bitcoin or other [cryptocurrencies]
Financial Times
Just as you thought you were getting your head around bitcoin and all the other hundreds of cryptocurrencies out there, the financial headlines are screaming at you about something called initial coin offerings or ICOs. Now you don’t really know what’s going on.
The latest news in the crypto world is that the People’s Bank of China (PBOC) announced yesterday that ICOs (Initial Coin Offering) are illegal and that all related fundraising activity should cease immediately.
But what is an ICO?
An ICO is like an IPO but kind of in reverse. It is a tool that trades future cryptocoinsin exchange for cryptocurrencies of immediate, liquid value. You exchange bitcoin or ethereum with the underlying company in exchange for a new token, say ‘ISawYouComing Coin’
A more formal explanation is offered byTravis Scher:
An ICO is a crowdsale of cryptographically secured blockchain tokens to fund the development and operation of one of three types of blockchain projects:
Aplatform-layer blockchain (such as ethereum or Lisk)
An organization that operates on a blockchain (known as a decentralized autonomous organization(‘DAO‘), or a centrally organized distributed entity(‘CODE‘)
Adecentralized application (‘dapp’) that runs on a platform-layer blockchain. Tokens that fund these are sometimes known as appcoins.
So far in 2017 $1.366 billion has been raised in ICOs. In global market terms they are still relatively small. But when you consider that US startups raised just $11 billion through IPOs in the second-quarter of this year then you can appreciate the rapid growth in the space.
The largest ICO so far this year has been by Tezos to fund its new blockchain tech which is still alpha testing. They raised $232 millionworth of bitcoin (BTC) and ether (ETH) coins.
To be clear, to partake in an ICO does not automatically grant you ownership or shareholder rights to the underlying company, as would happen in an IPO. Instead you are exchanging money for a token that may or may not succeed in the future.
Given how many thousands of cryptos are currently competing with one another this is a real punt. Investors have to make sure they spend a huge amount of time researching the underlying blockchain, the market, the team etc. You should only go for an ICO if you have a very significantappetite for risk, no concerns about losing your capital and love a good flutter.
Sound little too new and Wild West? You’re not the only one who thinks so and there is plenty of evidence to back up your concerns.
There is no regulation ensuring that those offering the ICO do so in a responsible manner as per other fundraising activities.
A quick search of ICO fraud and you will be confronted with many articles (all from 2017) reporting on various ICO scams. Plus Paris Hilton has just jumped in on onenot to cast aspersions but, but, butit is
So what’s the deal? A $2bn+ fundraising market and no regulation?
In a brilliant report bySmith+Crownit is explained how the usual rules of fundraising can be avoided by ICOs:
Most ICOs today are marketed as ‘software presale tokens’ akin to giving early access to an online game to early supporters. In order to try to avoid legal requirements that come with any form of a security sale, many ICOs today use language such as ‘crowdsale’ or ‘donation’ instead of ICOs.
Don’t forget the bitcoin and cryptocurrency industry is also relatively unregulated. By allowing it to grow organically and without various regulatory restrictions we have seen major shakeouts in the industry and it has forced its members to pull up their socks and seek out regulation.
However ICOs are now at a point where they are no doubt attracting unsophisticated investors. I have met many people who are worried they have missed out ‘on the bitcoin thing’ and believe that by getting in on an ICO they might be getting ahead of the game.
These same people tend to know little about blockchain instead stating that it is ‘the next big thing’ and just have major FOMO.
Without regulation there is little protecting newbie investors.
What’s the difference between an ICO scam and all the other’s we’ve seen before now? Matt Levine of Bloomberg explains it perfectly:
‘an ICO scam is subtly different from a gold-mining scam in that, with an ICO scam, you can do a scam ICO. You don’t have to get a publicly listed company and pump and dump its stock: You can just say I’m doing an ICO, here’s the address to send money, and people will send you money if you have scammed them correctly. Lord knows, ithappens often enough. This does not work as well with gold: You can’t say I found some gold, please buy some, because buyerswill want to see the gold. (Well, therearegold scams like that, but they seem harder to pull off.) With an ICO you may have to write a white paper explaining your token, but the quality bar for that is low, certainly lower than faking up some bars of gold. Lower even, I would think, than faking up a public company, making false filings with the SEC, doing wash trades to pump the stock higher, and then dumping it at the right moment on unsuspecting buyers.’
The government clampdown
But this may now be about to come to an end. Seven-China based regulators took sweeping action against ICOs, putting both the practice and the future of the underlying tokens at risk.
A joint statement released by the regulators explained:
[ICO financing] is a kind of non-approved illegal open fund raising behavio