The Top Ten Reasons You've Lost Your ICO Investment
By FF Newsroom · 26 February 2019
By: Sky Guo, CEO of Cypherium
Last week, the U.S. Securities and Exchange Commission (SEC) published its official guidelines for launching and investing in Initial Coin Offerings (ICOs). In it, the SEC stated that ICOs may fall under the legal definition of security offerings, which promote “the likelihood for future returns based on the entrepreneurship or efforts of others.”
This brings into focus a number of interesting questions: Why do we trust certain projects over others? Why must there be such stringent laws in place to protect enthusiastic supporters of new projects? And, perhaps most importantly, why is it so easy for technical projects in particular to captivate the minds (and wallets) of modern investors? Unfortunately, most ICO investments have lost either some or all of their initial value. Here we examine some of the most popular culprits of this widespread depreciation.
- You got scammed.
The sad reality of most early-stage industries is that bad actors will often flood the market. The opportunity to make an effortless and significant amount of money has appealed to a lot of folks who know how to manipulate a given market, and the cryptocurrency and blockchain space is no exception.
- You didn’t read, or truly understand, the whitepaper, which outlined what the team proposed to do.
Unfortunately, the rest of this list lays blame at the feet of well-intentioned people, hopeful investors, and start-up teams. Regardless of the project, However, it is the responsibility of the investor to do their research regardless of the project at hand. If you did not do the requisite research to know where your money was going — or worse, if you just followed an “influencer” who was paid in equity to tell you about a project — you were near guaranteed to fail. This kind of blind faith strategy has worse odds than any given roulette table.
- The tokens were built on top of a network that couldn’t survive the recent blood bath.
Most new projects in the crypto space fail solely due to the turbulence of the market. In the bull run of 2017, most projects set themselves bravely to sea unequipped for the storm that awaited them. Over the last year, most of these projects have found themselves in choppy waters trying to build a cruise ship on a raft size frame. Let’s say you set sail with 5,000 ETH in January 2018 when that looked to be about $5 million and rising: Today, of course, you’d have about two weeks of operation left in the budget.
- The coins were a new part of a protocol that was not fully tested.
The most exciting projects in crypto come from new ideas and uncharted territory. In a way, the entire industry is a kind of provisional hypothesis. Due to this emphasis, the industry has placed a huge premium on academic interest. In fact, the newer and more unknown a concept, the easier it becomes to grow its hype, as there are no established fears or drawbacks that need to be addressed. As such, a number of projects have adopted mechanisms that come straight from the drawing board without being tested in the real world by engineers and developers who can ensure their usability.
- Tokens were not an integral part of the project.
During the ICO craze, new enterprises used any excuse to introduce tradable tokens into their projects, regardless of the role that these tokens supposedly had. Virtually all projects claimed to have been utility tokens used to operate the network, but unsurprisingly, few of them ever even produced a “network” or anything other than a fungible placeholder.
- You bought out of FOMO and into the hype.
There are lots of ways companies can leverage a bullish environment to their undue advantage, and they range from the predatory to the mundane. This includes paying content creators and celebrities to back their product or astroturfing with tons of fake social accounts that had clear interests in obscuring the true virtues of a product where paying for advertising and reviews seems more expected. In any case, investors of all ranks were inundated with hype, the volume of which seems directly correlated to the market cap of Bitcoin. In Q4 2017, FOMO and hype funneled money into tons of projects that seem to have collapsed under such weight.
- The ICO you invested in did not comply with any regulatory bodies.
We have not seen the last of this issue. The SEC and other governmental agencies have shut down plenty of crypto-related operations and will continue to dole out unfavorable rulings. The ethos of Bitcoin and Ethereum have led the community to thumb their nose at regulation in general. However, early phase startups are at the government’s mercy in a way that established currencies are not.
- The project lacked marketing and had no real business plan.
Good ideas in a space flooded with new and exciting ideas can get drowned out easily. An integral part of the success of a new crypto company will be wise marketing and strict budgeting. Many of these companies have applied a kind of Silicon Valley ethos to their projects without realizing that the climate is fundamentally different. The name of the game for nascent crypto endeavors should be survival, and new ventures should not be wasting their seed money to impress investors that they have already secured.
- The teams cut their losses.
In Silicon Valley, exits pose clearer goals. Founders look to sell their companies and work tirelessly to do so. However, there is no market yet for startup exits. Instead, crypto founders seem unable to resist the more dubious thing and pocket seed funding while closing up shop.
- The project was simply a bad idea.
In the end, a project can do everything right and still fail. This is the normal danger of investing in startups. Considering the climate of the blockchain industry which is regularly under the threat of volatility, this becomes only more urgent. Many agencies intend to do their due diligence, but ultimately time alone will be able to tell what products will prove useful for the users of today, the enterprises of tomorrow, and a decentralized future writ large.