“Fortune is of sluggish growth, but ruin is rapid.” - Seneca
2000 years ago, Seneca shaped the concept we must live our lives knowing ruin can come upon us at any given moment. And as his theory suggests, the ruin is always rapid.
April 9, 2018, was the day when over 32 000 cryptocurrency investors woke up to the news that their money was gone. In fact, it had been gone a month ago, when Modern Tech, the owner of the “Pincoin” project left their offices with $660 million raised through token sales.
Ridiculous digital asset ideas and pure crypto scams are popping up every day. From the biggest ICO, describing the uselessness of its tokens, through projects having Ryan Gosling as their lead graphic designer, vanishing with more than $800 000, to companies outsourcing sin forgiveness and recording transaction times between their investors and… Jesus Christ — even the SEC started trolling the fraudulent crypto projects. The truth is that, nowadays, every single idea can get funded through token offerings.
Thanks to the easy access, gigantic hype and lack of strict regulations, in recent years ICOs have become the easiest way for companies to raise funds. Statistics confirm that the last two years marked the period with the highest number of ICOs with 875 for 2017 (more than $6 billion raised) and 1257 for 2018 (more than $7.8 billion raised).
The problem comes when we take a look at the percentage of the ICOs that go on to deliver what they have promised to. Research by the ICO advisory firm, Satis Group, concludes that for 2017, only 8% of all projects with a market cap of over $50 million have ended up trading on a designated exchange. The rest 92% are classified either as scams, failed or dead. In fact, the list with dead coins is steadily expanding with over 900 projects, as of now.
Heading for the cliff-edged scenario
“Seneca collapse” is a term used to describe gradual growth, followed by a rapid decline. Nature, history and even our day-to-day lives are full of relevant examples. Empires are built for ages, just to collapse for a few months. It takes you a couple of seconds to inflate a balloon, but less than one for it to burst. The “Dolania Americana” mayfly spends more than a year in its nymph form, only to emerge as an adult and live for less than 5 minutes.
The reason why the gradual growth is followed by a rapid decline is the breakdown of an element, crucial for the functioning of the system. When it comes to the crypto industry, the element we should fear from losing the most is investors’ confidence.
The main goal of financial markets is to help new companies innovate and grow by easing them in the process of attracting investors and raising capital. The world of ICOs today does not differ from the one of crowdfunding, where the funding is more of a donation, rather than an investment. In both cases, there is a high probability that the investor won’t be able to witness the actual application of the capital he has invested.
The fact that for every transparent token sale, there are 9 others, designed with the main idea to exploit investors’ trust, may harm the sector’s credibility. Mass confidence is built up slowly, but as Seneca’s theory suggests, it may be lost in a glimpse. Once investors stop trusting the ICO industry, it will be the companies that need the publicly raised capital to develop meaningful technologies that bring real value, which will suffer the most.
A systemic issue
Much like the credit derivatives that lead us to the Financial Crisis of 2008, the case here is once again two-sided.
- The regulatory landscape
It is reasonable for regulators to struggle to keep up with the pace of the sector’s evolution. However, it is the lag in the actions of the oversight authorities that has created the situation we are currently in. Although many national regulators have already issued ICO guidelines, the legislative framework is far from reaching ultimate efficiency in the prevention of fraudulent token sales.
The legislative loophole is contributed also by the fact that regulations can differ between national jurisdictions, as well as the progressive efforts of some countries to attract blockchain entrepreneurs that result in the provision of far too liberal regulatory guidelines.
- Investors’ greed
On the other hand, many project owners take advantage of the existing regulatory loophole that allows them to advertise their projects as “token generation events” or “coin promotion events” and avoid stricter ICO compliance. This forms the perfect prerequisite for exploiting investors’ “California dreams”. Nowadays, anyone can join the digital gold rush, tempted by the massive returns that are advertised and the fear of missing out on the next big thing.
The bottom line
Bitcoin.com’s research concludes that the first two months of 2018 costed investors in fraudulent ICOs and scam crypto-related projects, $1.36 billion. Today, the bar for raising capital through token sales can’t be placed any lower. The fact that numerous startups have run away with millions with nothing more than a website and a copied white paper says more than enough about the chaotic picture of the cash-absorbing ICOs.
The only way we can contain this epidemic is through a combined effort — stricter international regulatory measures and a more cautious approach by investors. If we fail to employ such a balanced approach, we are in for a world of disappointment and losing the truly innovative ideas that won’t be able to live up to their potential.