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ICOs: Initial Coin Offering or Idiotic Cash Out?

For those who are new, my name is Jeremiah. I’m not a cryptocurrency expert, nor am I an economist. I

The Block

December 6 · Issue #4 · View online
Weekly curated #cryptocurrency news and commentary.

For those who are new, my name is Jeremiah. I’m not a cryptocurrency expert, nor am I an economist. I am an enthusiast who believes that cryptocurrency and its attendant technologies are the prelude to a Cambrian explosion of innovation in “real/cyber-space,” where the digital and physical worlds meet.
This is a weekly email digest comprising a short topical essay about the crypto-space, followed by a manageable collection of curated links.
If you know anyone who’d be interested in this kind of content, they can subscribe here. I’ll be playing around with the format from week to week to see what I like best, and I love feedback, so don’t hesitate to email me.
Without further ado, let’s jump into this week’s topic.

Initial Coin Offerings
ICOs, or Initial Coin Offerings, are where a company issues its own cryptocurrency in order to raise funds for itself. During the ICO a set number of cryptocurrency tokens are released, which users can purchase in exchange for another cryptocurrency (typically Ether, but does not have to be).
Unlike IPOs (Initial Public Offerings), owning the tokens issued from an ICO does not mean that you are a part owner of the company in the way that owning shares of a stock does. Investors in ICOs hope the issuing company releases products or projects that raise the price of the issued tokens (by making it attractive to other buyers, who will hopefully purchase the token at higher and higher prices, causing its overall value to increase).
In some cases, owning enough tokens may confer voting rights, but this would be on a case-by-case basis. In the best scenarios, ICOs have increased token-holder value while also raising capital for the corresponding company. In the worst cases, the money, along with the ICO creators, have vanished, leaving investors with a worthless coin and unable to redress the fraud.
What Is This Madness?
At first glance, ICOs may seem like another word for scam.
You’re telling me that a company can create money out of thin air? Only they won’t call it money, they’ll call it a token, and that token represents a store of value in that company? And you can purchase that token with other cryptocurrencies? And the token is worthless except as a medium of exchange with other token holders? And I don’t get any ownership in the company? And the company itself may not be legitimate, so if it disappears, my money does too?

After all, there’s already a way to do this, legally, and via a regulated body. It’s called an IPO. Companies under IPO issue stock on a stock exchange like the NYSE. Individual investors can purchase shares of that stock for partial ownership of the company. Foreign investors have to jump through hoops to invest in American companies, and vice versa, and stock issuance is regulated and overseen by regulatory bodies, and you have to be accredited and certified to even list on the exchanges, which lends IPOs the kind of legitimacy Michael Corleone wanted before he took over his father’s “business.” 
ICOs, on the other hand, are new and somewhat untested, and rife with questions. Are tokens securities or are they utilities, and should they be treated as such? Are they a totally different and new asset class altogether? What’s to prevent customers from being defrauded? Should there be oversight by a regulatory body or governmental agency to prevent fraud or illegal activities being underwritten by ICO money? And who was it that decided Bernie Madoff wasn’t just a nice gentleman from Queens? (That’d be the SEC, which has so far remained silent on the issue of ICOs, though signals have been detected.)
Given their “wild West” status as fundraising vehicles, ICOs are and will be undergoing increasing scrutiny by regulatory bodies. And yes, there have been a number of scam ICOs, which were used to raise millions of dollars before disappearing into “the ether” (pun intended) leaving investors as fleeced as unshorn sheep. But there have also been a number of high-profile, legitimate ICOs, which has increased cryptocurrency visibility as well as signaled that this money-raising mechanism is not only viable, but can be extremely profitable for both the company issuing the token and its investors.
ICOs have raised over $3.5 billion in 2017, surpassing traditional VC-based funding in August 2017. On a relative basis, this is still a rather small amount, especially on a global scale. Nonetheless, the speed at which ICO fundraising has gained prominence and popularity indicates that, absent regulation, it’s difficult to imagine a future in which raising money via ICO is not a significant part of the financial landscape.
Just tell me how I can make money off these ICOs
As always, I encourage anyone looking to invest in an ICO to research, research, research, just like you would if you were to invest in a company on the stock market. You ARE researching your stock picks, aren’t you? 
Find out about the development and marketing team of the company running the ICO, see what kind of community connections they have, who they’ve worked for previously, and don’t just rely on their snazzy website to convince you they’ve got the next Amazon waiting on the blockchain. 
Ask yourself if the coin being offered has a significant chance at long term value, and it will only have that if the company itself has a legitimate product or service that will fill a need in the market that itself can’t be done better than on the blockchain. Don’t rely on hype or fear of missing out when making investing decisions. 
These are salient points you should ask yourself of any ICO: 
What is the company’s motive for releasing their own cryptocurrency? If it seems that there’s no underlying technical problem being solved or if it feels like it’s a cash grab, beware. There should be more than pie in the sky sentiment around the offering, more than a generic “we’re solving problems” vibe to the ICO. If it’s just a whitepaper espousing vague notions and high-minded idealistic visions, be cautious about investing. If they have an actual demo product, that’s better, but test drive it if you can, and see what is behind the curtain. A good question to ask is, How does this token add value to the product or system? If there isn’t a good answer to that question rooted in specifics, it likely fails the smell test.
For example, Augur’s tokens allow holders to predict the outcome of events, and rewards them for accurate reporting, and does so without a centralized authority; the blockchain is the governing authority. The elimination of the middle-man is the underlying conceit of the blockchain, so it makes perfect sense to use a token for this kind of secure reporting. This would be an effective use of blockchain tokens.
On the other hand, Hydrominer allows token holders to “rent” mining time on rented hydroelectric-powered computers, utilizing their custom token for payments. This is a fancy but ultimately convoluted means of pool mining, and could just as easily use fiat, without any loss or reduction of service. This fails the “Why blockchain?” test.
How many tokens is the ICO offering? How much cryptocurrency is being released, and in what manner (staggered release, all-in-one dump, or other)? Is there a token burn schedule? Try to run the numbers against a known entity so you can get a feel for if it seems like they’ve done the proper maths to make an ICO that won’t fizzle. If they release too many tokens, they run the risk of pump-and-dumpers purchasing tokens en masse with the hope of flipping them once the coin hits the first exchange. This would put massive sell pressure on the token, devaluing it significantly, which could impact your potential profit. ICOs with a solid token release plan often have years-long roadmaps before real profitability can be achieved. It’s vital to go in knowing as much of this as possible, so as to have proper expectations on a return on investment.
Who is behind the ICO? Is the development team solid? Do they have big hitters with proven records? Does the team even exist at all? Are they technology oriented, or are they more of a marketing group? Google makes it relatively easy to track the team behind the ICO, to determine its legitimacy within the cryptocurrency community, and if they have a viable product offering.
And speaking of ICO scams….
SEC Emergency Action Halts ICO Scam
Links of Note
Why Most ICOs are Scams
Types Of ICOs: Which One To Trust
Can you trust crypto-token crowdfunding?
A complete list of ICOs, token sales, and crowdsales
7 tips to choose the most profitable cryptocurrencies
Japanese banks exploring own cryptocurrency called the J-Coin
You Don’t Understand Bitcoin Because You Think Money Is Real
Top 5 Reasons to Give Your Mom Bitcoin for Christmas
And finally, one interesting Bitcoin mining story for you, using the latest in EV technology.
Tesla Owner Builds Bitcoin Mining Rig in Model S
Wrap up
That’s it for this week. Thanks again for reading. If you find this newsletter useful and interesting and you think someone else would enjoy it, please forward it to them. You can always subscribe or read back-issues here.
If you want to get started with Bitcoin or one of the two major altcoins (Ethereum and Litecoin), sign up for a free account on Coinbase. Once you buy or sell $100 or more of digital currency, you’ll get $10 of free Bitcoin.*
That’s all for this week. Thank you again for reading. Please send me any articles you think would be good for future newsletters. If you have any questions you’d like addressed, feel free to contact me. I do respond to everyone who writes me.
* This is a referral link, so I’ll also get $10 for any eligible signups.
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