ICO and “pre-mined” coin offerings have lately been the hottest topic of discussion in the crypto currency space. Whilst this is an exciting new frontier, there are a host of underlying issues which have no universal solutions yet and this is still a market which is finding its feet.

Bitcoin and alt-coins

Bitcoin was the first decentralised crypto currency, and since it started there has been thousands of alternatives or ‘alt-coin’ clones created. Many have remained, because they can do something bitcoin cant, or better than bitcoin.

Many alt-coins market themselves as the ‘next bitcoin’, and encourage people to buy the coin ‘on the ground floor’, and in almost all cases the reason for the creation of these alt-coins is to enrich the creators of the coin…and many are to put it simply ‘pump and dump’ coins. These coins are hyped on social media, and not too long after the coin launches and has gained some value, there is typically a ‘dump’ of coins on an exchange, as people with large holdings cash in on the price.

It is because of these ‘pump and dump’ coins, that it has become a tell tale sign of a ‘bad’ coin, if it is ‘pre-mined’….meaning that before it is even launched, there are people in control of large amounts of the coin, and it is not fairly distributed. In cryptocurrency, pre-mined coins are bad, and everyone knows they are “pump and dump” coins, if you buy them, you are playing with fire.

What is an ICO?

An ICO stands for ‘Initial Coin Offering’, which is supposed to be a method of crowd funding. In an ICO, a user provides an upfront investment of bitcoin or ethereum, in exchange for tokens which can be exchanged for the new coin once it is released. It is kind of like getting shares in a company that can be easily traded. Since the method of joining is usually bitcoin or ethereum, it is quick and easy to do, and completely unregulated.

Companies dont want to get into any trouble, so they market the ICO as a ‘crowd-sale’, and market it as giving early supporters premium access before it is available to the public.

A company that needs to raise lots of investment capital can have an ICO, and issue tokens for sale. Users who believe in the project and how profitable it will be, can buy tokens, and this immediately funds the company, sometimes into the hundreds of millions of dollars. Compare this to when a company wants to raise lots of investment capital and offers shares to investors, in this case the Securities and Exchange Commission (SEC) imposes regulations that help protect investors who buy in.

An ICO is basically an unregulated IPO with no rules and regulations, or precautionary check-boxes that would have to have been passed during its creation process. There is no regulatory body policing it, and it is all at your own risk.

ICOs what could go wrong

Almost every day now there is a new ICO starting, and that means lots of money flowing into them. Where there is lots of money, there is also people wanting to take that money, and many ICOs are outright scams or schemes just to get money from users who are wanting to invest for fast profits. It is far too easy to write a whitepaper and trick speculators to invest and pump, while at the same time it is too hard for most people to tell difference.

Some ICOs go bust before they even launch, and good luck to you trying to get your money back. Some ICOs even get hacked, and lose customers funds….The point is that its the wild west in ICO land, and sooner or later the hammer will also come down on them as essentially they are securities and are subject to all the regulations of securities.

Recently China stated regarding ICOs that it is an unauthorized and illegal public financing activity, which involves financial crimes such as the illegal distribution of financial tokens, the illegal issuance of securities and illegal fundraising, financial fraud and pyramid scheme. Since this statement, and now ban of ICOs in China, many ICOs have to refund users their investments.

ICOs and Alt-coins

ICOs while they are tied to a company or product, are basically alt-coins on a 100% pre-mine, just with a re-brand of the terminology. You are buying a coin that is unfairly distributed to users and a large portion of the coin is held by the company running that created the coin.

Often when an ICO is launched, who do you think is the one dumping large amounts soon after it has been hyped and pumped in the media? Only the ones with access to large amounts of tokens. The company needs money so it runs an ICO, the only way to get access to that money after the ICO, is to sell the tokens it has kept for itself at the new valuation from the pump of the token. Therefore as soon as a company gets its ICO funding by issuing its tokens, it will often dump large amounts of its tokens…which often crashes the price.

The pre-mined alt-coin is exactly the type of coin we all need to stay away from, and that is what an ICO is, with a fancy marketing team. Most ICO coins are tied to companies, and are shares / securities in the company, and the law needs to be adhered to. Many ICOs might be OK in the eyes of the law, and many will not.

We believe bitcoin is a high risk investment as the price is extremely volatile. Even holding bitcoin is a gamble, as you are betting on the price being higher in the future. Taking that into consideration, adding additional risk to that gamble, by putting your bitcoin into an ICO that may or may not be a scam is a bad idea. Even if the ICO is 100% sound, it does not guarantee that the company and its management is, or that it will meet its targets, or even be a success in the future. Even good companies fail….and what if it is a success? If the company is bought out by another, where do you stand, if your token is just a token, and not a share? Putting money into an ICO is gambling with your already risky bitcoin, and betting on a company in a get rich quick scheme. All of which will most likely be hit hard by rules and regulations in the near future.