Initial Coin Offerings (ICOs): you have been warned

A timely entry by Fred Wilson, a well-known venture capitalist and prolific blogger (one of the few who write daily, like another I know :-) calls for caution in the face of the huge number of Initial Coin Offerings, or ICOs, and in particular against celebrity endorsements, famous people who use their social media profile to attract potential investors.

An Initial Coin Offering, or ICO, is simply company requesting a round of financing by launching blockchain-registered coin issuance, creating its own crypto-currency through a mechanism that validates transactions, linking it with an investment in the company. It’s not a bad idea in principle, allowing as it does, for the establishment of a flexible mechanism of financing anyone, not just specialized investors, can take part, and free of many of the barriers to traditional financing rounds.

Which is precisely where the problems arise: in the face of the pull effect and news coverage of crypto-currencies and their rapid increase of value, some investors seem to think that the use of a blockchain guarantees profits, and that all ICOs are, by definition, a sure-fire investment opportunity.

When something appears to be too good to be true, it’s usually because they are. ICOs are no different to any other investment opportunity: some are issued by companies legitimately using this unregulated mechanism as a legitimate way to raise capital and are willing to use that capital to generate value. At the same time, there will also be fraudsters trying to raise money through their own crypto-currencies that will soon be worthless. There will also be other kinds of frauds taking advantage of the popularity of crypto-currencies’ popularity and the inexperience of many small investors through tricks like changing a letter in the company name, offering an incorrect URL, etc.

Given that right now, anyone can launch an ICO, we have seen hundreds of ICOs in the first half of 2017, raising $ some $1.2 billion dollars. Now that celebrities are joining the gold rush, telling their brainless fans to join them in investing in this or that ICO, we might reasonably wonder if those celebrities are endorsing an ICO in exchange for money and that the impact of legal action and a fine will be of little consolation to the idiots who put their life savings in an ICO because their favorite boxer, soccer player, actor or whatever told them to via social networks.

When evaluating a possible investment, as ever, you have to take into account the nature of the project and its expectations of profitability, its management team and its ability to implement the project, the money they intend to raise and what they say they want to do with it, the reasons for which they are resorting to a particular financing mechanism, and above all, what they have demonstrated so far, including, in the case of technology-based projects, prototypes or technological developments.

ICOs can be a very interesting way to raise capital by directly involving potential investors, but they can also be an opportunity to take advantage of inexperienced people for who think that anything to do with crypto-currencies is an opportunity not to be missed. If the team launching the ICO is still working on plans and has not produced anything solid or demonstrable, if they have nothing special or outstanding to contribute, if they intend to outsource all development to third parties or if they intend to raise a lot of money without saying clearly what they want it for, then they are probably scammers.

China and South Korea have recently banned ICOs, while the Russian authorities have issued warnings and are likely to follow suit. The United States has is about to issue regulations, although it wants to avoid excessive control that could hobble their potential to finance some ideas and projects.

I am sure that ICOs will play a very important role as a funding mechanism in the future, but for now, let’s not forget the way a project is financed doesn’t make it better or worse, that there are shysters out there looking to take advantage of the popularity of ICOs, and that allowing scammers to create their own currencies is, at best, hugely irresponsible.

(En espa?ol, aquí)