Investing in ICOs May Be Even Riskier Than You Realize | Hacker News Reader

Investing in ICOs May Be Even Riskier Than You Realize

bloomberg.com

59 pointspetethomas38 comments

There are so many articles about ICOs that don't offer any new thinking. This one covers:

1. Lots of ICOs happening (crossed $3B in money raised).

2. ICOs are risky.

3. SEC will likely use the Howey test to determine which ones are securities (and therefore need to comply with securities law)

4. Startups may be able to protect themselves by limiting token sales to accredited investors and providing more disclosures in their white papers. (a hack that most people now are well aware of -- i.e. the utility token + SAFT route)

5. When you invest in an ICO, you not just take financial risk, but also may inadvertently be breaking a law (basically, ICOs are fraught with uncertainty)

I wish we heard something new. Clearly, there is something interesting happening - a new way to raise money, or perhaps a new way to launch products. In the long run, it is exciting because it will help launch useful products and services. But many articles often just regurgitate what most people already know, and don't offer anything new.

I suppose regulatory authorities at some point will offer a way forward (by regulating this space -- which I think would be a good thing!). Until that happens, we just hear a lot of armchair thinkers and potential practitioners just conjecture endlessly.

Bloomberg is targeting this at their reader base (general investors), who may or may not be up to speed on the latest ICO discussion, or aware of any of these issues. News reports targeted at the broader market are always going to seem obvious/repetitive if you're already active in a sector.

I agree with both of you. Yes, it covers what most people in the space already know, but these things must be reiterated to the public. For every ICO hype article, a piece like this should exist.

I understand that people offering the tokens ("promoters") may be breaking the securities law, I can somewhat understand that exchanges listing them may be breaking the law, but under what conditions can buyers/investors be breaking the law?

you break the law if you sell the token. So, suppose you buy it on an exchange and then sell it to a non-accredited investor. if the token is a security, you selling it is breaking the law, even if you are not the issuer.

My view is, in the future, startups will lean towards airdropping tokens for free, once the initial wave of raising money pre-product subsides.

All discussion of ICOs suffer from a common misunderstanding of the word 'risk'.

"People should be allowed to invest in high-risk/high-reward opportunities" the crypto community will say. But that sentence involves a sleight of hand: Financial markets are made to manage and quantify "risk", yes. However, the risks of financial markets are almost exclusively those of future events unknown (and mostly unknowable): Will people like this movie (once it's made)? How much oil is in this or that field? Is it possible to deliver pet food over ethernet?

ICOs' "risk" is about facts that are currently known by some people, with those people being the ones selling you their tokens: Will they actually build a product or abscond with the $500 million they collected in the ICO? Is a has-been boxer a good investment advisor? Does this company's CTO, one "Loyd Techmanski, PhD" actually exist?

I feel like people hear the word 'cryptocurrency' and ignore all of the well established risks of currency speculation as an investment strategy.

In this case it's speculation on unregulated penny stocks rather than currency speculation, but yeah, same applies. Cryptoland seems doomed to repeat the mistakes made by the traditional markets over the last couple of centuries.

Sadly it is also utilizing people's unfamiliarity with cryptocurrency to execute scam schemes.

For example I recently run into a ponzi scheme that utilizes a bitcoin[1].

[1] https://bitconnect.co/

Looking at the past (Bitcoin's returns) and FOMO does make people do stupid things. (It's a trap many who invested in "Internet stocks" were caught in as well)

I'm wary of even considering these things 'currencies' as most of them are not used as such.

Because they don't relate to underlying assets of the company, they're basically impossible to value.

Most ICOs are playing off these things, trying to avoid the SEC, and in turn, hurting investors by giving them a bad deal. Tezos, for example, calls their investors donors, giving them donations. This is disgusting.

We (see profile) are doing the right thing by issuing an unregulated security. With privacy tech this will not be a problem for investors, and we absorb the risk along with the other risky things we do. Our contingency system will allow the platform to continue even if we have an accident or fail our opsec and are outed.

I do not quite get this article saying that ICOs are riskier when they issue shares or equivalents. Investors are at a better position if they own part of the underlying company instead of a token that could simply be replaced. Nothing stops Filecoin or the other storage companies, for instance, from pegging the value of the token very low, or outright issuing new tokens or just accepting ETH/BTC/XMR like they should.

People lost a lot of money (some all of it) in the dot.com bubble. Despite all those stocks and IPOs being "regulated". And in that case those stockes were heavily peddled by well known brokers or advisors (not the case in ICOs yet). Does it feel better if you lose your money in a "regulated" way? Can you recover it? When $65b disappeared thanks to Madoff the SEC looked the other way (or not at all, rather). His company was "regulated" too. But you cannot even sue the SEC...Regulation adds costs for lawyers, auditors, brokers and the exchange. But it doesn't prevent you from losing it - as the dot.com bubble demonstrated.

The point of regulation isn't too prevent you from losing money, it's to prevent some common forms of fraud.

Like Madoff...???

Precisely. The argument is that they are less common due to regulation (not that they cease to exist entirely).

Madoff is serving a life sentence in prison and forfeited billions. He didn't get off scot-free in any way.

This example proves tdb's point, not yours. The SEC did its job, which was sending Madoff to jail. Its job was not to make everyone's money come back and redistribute it.

Actually - the SEC didn't do its job at all:https://www.reuters.com/article/us-madoff-sec/victims-of-mad...

Pointing out examples of people breaking the law, getting caught, and going to jail for it is not a good argument against having the law in place.

I mean, do you point at an example of someone committing murder, getting arrested, and going to jail for life as a reason that we shouldn't have laws against murder, since clearly people still murder anyway?

Or to make it more difficult to compete, depending on your word view...

"Competing" through fraud subverts the free market.

The "f* the system" mentality of crypto enthusiasts is —albeit somewhat warranted—often over the top and slightly annoying. Madoff was arrested and is serving life in prison. What more do you want?

I think people want their investments and life savings back, that would be nice.

At the end of the day, your money isn't insured just because the SEC is regulating a market. And the overall point is that regulation at the end of the day does not equate to safety and no risk.

I want less fees so I can increase my profit margin, some are doing fraud in cryptocurrency which is bad but as MtGox fiasco has shown this free market with more freedom than traditional markets is self-correcting

Money back perhaps...???

Yes. Some degree of SEC regulation would definitely be 'better' in almost every way.

When companies are forthcoming in their public statements - then equity buyers on the hook for for their greed.

With ICO's - it's just open to any kind of scamminess by anyone and everyone - and so we can basically be guaranteed that this is going to happen.

What powers does SEC have here if the people behind the ICO are anonymous and you invest anonymously?

Bitcoin anonymity isn't usually all it's cracked up to be.

And in any case, most of the people involved aren't anonymous, in practice.

The SEC has $$ and ability to get Guys In Robes(tm) to send Guys With Guns(tm) to enforce its "outdated" laws.

Edit: down voting this does not change the facts of life.

Courts have more power than crypto enthusiasts/crypto promoters/pump and dump peddlers/etc. That power is enforced by Guys With Guns.

This reminds me of the frequent argument that "bitcoin's value is just as unfounded as the us dollar's." Sure, as long as you don't consider the US dollar's value to at all be related to aircraft carriers and ICBMs. That said, I think there's room to argue that bitcoin or a future cryptocoin could have advantages which exceed the value of those factors.

The value of a currency as either a store of value or as a medium of exchange is directly proportionate to ability of the entity that uses the such currency to beat whoever does not like this currency into pulp on a global scale (aircraft carriers, ICBMs, nuclear submarines, US Marines, etc) or police, judiciary, prosecutors on a local, state and federal level in case Punk Joe decides to rob aunt Suzi on her way from a bingo hall.

That's why GBP was very valuable when Britain was the big dog on a block, US dollar is highly valued now and currency of Venezuela is in a toilet.

Decentralized nature of the crypto-currency is something that will destroy its value as there would be no one to beat the living shit out of the Punk Joe on a behalf of Aunt Suzi or US Navy showing up next door.

Where I do think we would see block chain applied is international settlements between central banks. Imagine, if you will, that all money flows between all countries in the aggregate would be visible and validatable by all central banks. Considering that we are rapidly approaching the end of the anonymity of inter-country banking it seems that those book-to-book transactions would gain a lot of additional legitimacy if Egypt CB could verify that the money moved from Sweden did not come from Israel CB if Egypt's position is not to accept Israeli' money.

What are you going to do when you cash out? Declaring tens of thousands of dollars of income as capital gains is going to be suspicious (because capital gains has much lower tax rate than regular income), so you better make sure you have all the documentation to prove to the IRS auditors that you're not trying to evade taxes.

If actual money is involved, then not every part of your investment is anonymous. If actual money is NOT involved, then the SEC shouldn't need to worry about it, right?

"What powers does SEC have here if the people behind the ICO are anonymous and you invest anonymously?"

An asset is an asset.

If you buy and sell something with cash - well - you have to tell the taxman, and possibly the SEC if you're doing something they should know about.

As in 99% of them will go down to 0.

Some might go under 0 - being a defendant even when innocent has costs too.

Reply on news.ycombinator.com