Every Facebook ad I see these days is something related to Bitcoin or cryptocurrencies. Most of them are obvious scams, and even have scammy names. Some of them are merely ICOs with large marketing budgets and time to plan for their coin distribution. There are others still that are advertising their get rich quick schemes, or how their day-trading exchange has 5% fees, which is 0.00001% lower than their competitors’. The point is, cryptocurrency is an unregulated, wild-west field right now. Anything goes, and so it’s important to be vigilant about what’s real and what’s not.
What is an ICO?
An ICO is an Initial Coin Offering. Like you thought, it’s basically the cryptocurrency equivalent of a stock market IPO. Except there’s no SEC or SEBI regulations, because there’s no cryptocurrency regulatory body or even a unifying ‘stock exchange’. An ICO right now, is therefore just a distribution of coins from a newly beginning cryptocurrency. Exchanges and investors who want to buy the coin can do so in exchange for a more popular crypto, Bitcoin or Ethereum. In fact, Ethereum started out with an ICO as well – for a price of 0.005 BTC per ETH. It goes without saying that an investment in the Ethereum ICO would have paid off. But the fact is, there are an increasingly large number of dubious technologies or services out there posing as ICOs to sell a product or make some quick cash.
Why are These ICOs Just Startups?
Go to any website for an unheard of ICO – something that your friend of a friend told you about, or came up in your Facebook feed as a sponsored post. I’m sure you’ve visited landing pages for these coins (all of whose websites end in .io, by the way, and have a Founders tab with links to their LinkedIn profiles) and seen them peddling the same things:
- Scalable payments solutions
- Do (thing) with one tap on your phone!
- Platform to build other applications on
- This coin is going to change (finance/investing/commerce) in (sector/region/world).
How is any of this different from a regular ol’ startup?
I can’t seem to understand.
I’ve seen coins coming up with applications such as “decentralized storage backups,” which can be done with simple SQL databases. I’ve seen “integrated payment gateways” that are just copies of Paypal. There are tokens that no human would ever have thought of and gone, “hmm, I think the solution to this problem is adding a proprietary token that I can only using for buying goods on this one website.” It’s fine if Amazon does it – because they’re Amazon, and there’s a certain level of guarantee that Amazon Pay isn’t going to run away with your money. Your balance isn’t likely to get devalued to nothingness either.
Take a look at some. of. these. websites. Read what problem they solve and think to yourself, if these companies weren’t offering cryptocurrency tokens, would it be possible to do what they’re doing? The answer is a resounding yes. In fact, with all of these examples, the solution to the problem already exists. Why do they need a new cryptocurrency token to accomplish their goal? All they do is add a ‘blockchain’ element and introduce their new proprietary token. And how does one pay for that token? In Bitcoin, of course. Which they will (hopefully) collect lots of in exchange for their tokens.
So Why are Startups Becoming Cryptocurrency Merchants?
A startup can only accept investment from accredited investors. Even a crowdfunded startup would need some level of marketing or merchandise distribution to compete with other platforms. They’d have to incorporate a company, abide by SEC rules, and be limited to raising funding from one market. When the same startup creates a blockchain with their own token and morphs itself into an ICO, suddenly, they can accept money from everyone in the world in the form of Bitcoin or other cryptocurrencies.
I’ll just go out and say it – a lot of these ICOs are scams, and most of them are doomed to fail. The fact that companies which traditional investors would never back, are branding themselves as ICOs and receiving millions of dollars means there’s definitely a bubble in the market.
If you think about it, every new innovative ICO that’s going to change the world with its new token, can just use one of the top 10 cryptocurrencies and get it done with. Is there any reason for buying SALT to receive a loan? Why can the founders of SALT just not use the Bitcoin network for the same security and provide a lending platform on that? The reason definitely isn’t in the innovative new technology that SALT is, mind you. SALT is one of the better ones – there are thousands of other cryptocurrencies out there who have no real reason to exist.
To sum it up, there’s a lot wrong in the world of ICOs at the moment. If you come across a coin that you really think has the potential to change the world, by all means, go ahead and buy it. But think about whether the technology itself has any merit on its own (like Ethereum did), or whether it’s just a way for the founders to maintain control over their own blockchain and fund themselves while they’re at it.