HERE’S WHY INVESTORS SHOULD BE WARY OF ICOS
Every so often, there is a technological advance or breakthrough that gets investors really excited. Cryptocurrencies definitely fit the bill and the biggest buzzword in this field in the past two years has been ICOs or Initial Coin Offerings – the cryptocurrency version of an IPO.
ICOs are currently very popular, but there are several significant causes of concern. And they’re not all to do with what an ICO is, but more with how people are using them and how their details can be verified and confirmed.
ICOs, obviously, have generated both excitement and apprehension. Some investors, including institutional ones, are watching keenly from the sidelines, while others have plunged ahead, lured by lofty promises.
In all this, one primary concern is that ICOs are currently not monitored or regulated by any legal framework or policies. Further, they only exist digitally, traded on exchanges that are presently online and beyond the purview of financial regulators.
When an IPO is launched on an exchange, there is a solid process behind it: asset valuation, future forecasts, estimated cashflows, backing by known financial institutions, and so on. But with ICOs, the major influencer is an investor’s ‘hunch’ or ‘gut feeling’.
Castles in the air?
Once an ICO is floated, there is no way of knowing the reasons behind daily rate fluctuations, because the ICO is traded as a company stock, not a currency. And with no research on how much is being invested or lost due to daily fluctuations, investors are clueless about why their ICO portfolio/investment increases or decreases – an extremely risky situation for the wider economy.
When international rating agencies such as S&P, Fitch and Moody’s assign investment advisory to equities or funds, they use formulas heavily rooted in the valuation of tangible assets, estimated growth and market goodwill. However, no established agency has come forward to provide advisory on ICOs, because no reliable formula exists yet.
Is it all a scam?
In India, we’ve already seen thousands of people losing heavily because of unregulated financial products such as chit funds. From this line of analysis, it appears that modern fraudsters are using the appeal of ICOs to launch their own scams and cheat people. While not every ICO is fraudulent, there have been so many ICO scams discovered in 2018 itself that it is definitely a cause for concern.
Just a month or so ago, a Vietnamese firm called Modern Tech raised nearly $650 million from an ICO for a token called Pincoin. Then the company launched another token called Ifan – investors in Pincoin initially received some cash returns and then got paid in Ifan tokens. Then the entire Modern Tech team vanished with the money. A similar story played out with a company called LoopX, which, after raising $4.5 million after an ICO, completely disappeared, deleting its website, social media pages, etc., and leaving investors in the lurch. The biggest problem here is that investors have no way of verifying such a company’s claims and, so, can get taken for a ride.
Trust in me
Say an ICO raises funds from investors and says that it will, in turn, invests in start-ups through VC firms or hedge funds. Who or what can guarantee credible returns to investors? No one. Currently, ICOs are only as good as the word of their issuers. With no accountability, transparency or even a clear definition of what can be behind an ICO, there’s a danger that fraudsters may use ICOs only to quickly siphon money and vanish, leaving investors high and dry.
Whether – and how – ICOs should be regulated by a central body is something that is being hotly debated today. While there is no clear answer yet, what is obvious is that if enough controls are not exerted, ICOs may well become another bubble that will burst, harming both people as well as economies.