This article is a warning about the ICO market today. With the rapid rise of cryptocurrencies, the belief is that there will be new cryptocurrencies that will explode in value. If it worked for Bitcoin and Ethereum, why not another coin?
Because of this belief, most ICOs today are not only getting funded, but selling out at record rates. BCAP, the first token for a Venture Capital firm, made $10 million in an hour. Gnosis, a prediction market, sold out within 10 minutes, netting about $12 million. Every week, there is another story just like this, and many more smaller successes along the way.
Edit: BAT ICO sold out in about 30 seconds, netting $35 million.
But this success comes at a hidden cost. Today, I want to discuss why investing in an ICO today is a terrible idea and how you can make a measurable impact in these uncertain times.
When Times Are Good, Everyone’s A Winner
Most of the investors in these new cryptocurrencies believe that their token is going to rise significantly in value. And today, the market agrees. Most cryptocurrencies in the top 20 by market cap have raised significantly in the last six months. Bitcoin is currenly worth over $2000 and Ethereum is flirting with a $200 valuation. This is many times more what they were worth just a few years ago.
If you extrapolate out, these smaller tokens could very well do the same thing, making a hefty return. Even if the token doesn’t take off like a rocket, it’s not uncommon for these tokens to increase two or three times their value when they reach the exchanges. A quick return like this is easily worth the investment.
This means that for ICO tokens that absolutely stink (and many of them do), they still make money in the short run. Because of this, many new enterprenurs enter the market, do the absolute minimum to get a project off the ground (a website and a white paper) and then launch. The ICO hits, makes a few million dollars and everyone is a success.
Lessons from the Dotcom Boom
This is not unlike the late 1990’s and early 2000’s during the dotcom bubble, when investors were lining up around the block to invest in anything with a ‘.com’ at the end of their name. Organizations that re-branded themselves as an internet company (doing something as simple as adding .com to their name) would create a noticeable increase in their stock price.
New investors, not understanding the real value, rushed into the market in order to make a return. Fair weather entrepreneurs and out-right scam artists set up organizations to take advantage of this frenzy and crowded the market. And for a beautiful, albeit short, time period, everyone felt like a genius.
And then the crash hit the market. Most of the scam artists disappeared overnight and Fair weather entrepreneurs struggled to make their organizations operate when money wasn’t flowing like rain water. Investors, sure of making a quick return, were left with stocks they couldn’t sell.
By the end of this time period, only the hardiest organizations and die-hard investors were left to piece together the industry. Most lost their money, jobs and reputations in the process.
Investing When Everyone’s A Winner Will Almost Certainly Make You A Loser
This brings us back to the ICO market, which is almost certainly in a bubble. Much like the dotcom bubble, the rising price of of ICOs and blockchains cannot be sustained. However, you may think you can get around this issue by only investing in only ‘good’ ICOs. You’ll invest in the amazon.com among the pets.com blockchains and avoid the painful downfall.
Here’s the problem with this: even with good research, it’s very hard to tell which organizations are going to make it through to the end. You may be able to find out who the scam artists are and have a method of finding winners, but even good organizations fail during crashes. When industries fall, even healthy organizations get cut.
Making money in the short-term is unlikely, if not impossible in these conditions. When the crash happens, investors and entrepreneurs are going to flee, testing the will of those who are in it for the long-term. If your investment horizon for tokens and blockchain is marked in months, you’re susceptible to this downturn.
The Stronger Approach to Investing
The simple rule for the ICO market today: Avoid investing in any ICOs. Among the regulatory concerns that exist because of this unconventional new method, there is a great chance that the short-term value of every token is going to collapse, even affecting established blockchain like Ethereum and Bitcoin. Your money will do very little to enrich yourself or even help your chosen project once the floor drops.
At the end of the day, the ecosystem does not need your money as much as it needs you. Projects are dying for intelligent, bright people who are intellectually curious, willing to struggle and willing to give their time to make the ecosystem better. The right skills at the right time is worth it’s weight in gold.
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