UPDATE: New report from Bloomberg Research shows that over 80% of Initial Coin Offerings in 2017 were scams. This report substantiates that an ICO carries a significant risk that participants will lose their investments.
Continue reading before investing your hard-earned money in cryptocurrency.
If you are considering an initial coin offering investment, then be warned about potential scams. Government regulators are stepping up enforcement against fraudulent coin offerings and scams targeting retail customers (you and me).
What is an Initial Coin Offering?
Initial Coin Offerings (ICO) are the digital currency market equivalent of stock market Initial Public Offerings (IPO) of company stock to the public.
An ICO is used to raise funds by issuing a new digital coin (cryptocurrency) to be used for company expansion, pay off initial investors or other business purposes. The new digital coin is exchanged for either cash, bitcoin, or another digital coin.
Why Invest in Initial Coin Offerings
Captain Obvious says the reason to invest in digital currency or ICO is to make money. A digital currency investment is much like investing in a currency or commodity. Profit is dependent upon a favorable price change large enough to cover transaction costs.
Investing in an ICO or IPO is the first opportunity the public has in getting in on the ground floor of a business opportunity. By assuming greater risk, an investor assumes greater reward.
How Risky are Initial Coin Offerings?
Given the lack of government regulation of digital currency markets, ICOs are risky. ICOs are risky because the markets are not doing well with self-regulation. We are seeing federal and state regulators stepping in to protect the public.
The U.S. Securities Exchange Commission, established by the Securities Act of 1933, regulates IPOs. The purpose of the Securities Act is to ensure disclosure of all material information to enable investors to make informed decisions. Until the Act was passed, regulation was left up to the individual states, which had a variety of inconsistent laws.
Jordan Belfort, “the Wolf of Wall Street”, was convicted and jailed for running a securities pump and dump operation. Belfort himself, who served 22 months in prison for securities fraud and money laundering in 2000, said that ICOs were
Now, the SEC has stopped the ICO of Dallas-based AriseBank on the grounds of being a scam. AriseBank allegedly targeted retail customers to fund what it claimed to be the world’s first “decentralized bank.”
The SEC alleges that AriseBank falsely stated that it purchased an FDIC-insured bank which enabled it to offer customers FDIC-insured accounts and that it also offered customers the ability to obtain an AriseBank-branded VISA card to spend any of the 700-plus cryptocurrencies. AriseBank also allegedly omitted to disclose the criminal background of key executives.
Unless I am totally mistaken about how cryptocurrency blockchain technology works, the idea of considering crypto currency as a type of bank operation is phony baloney.
And we are years away, if ever, from the U.S. Federal Deposit Insurance Corporation insuring digital currency accounts.
What Makes Initial Coin Offerings So Risky?
ICOs are so risky because they are promoted with a great deal of urgency and without government oversight to ensure full information disclosure.
ICO promoters often use psychological urgency principle to influence purchaser/investor behavior. They use deadlines (clock countdowns) to create a sense of urgency. A sense of urgency causes the purchaser to act in haste and suspend rational thinking to avoid the fear of loss. “If I don’t act now, I will miss out.”
A sense of urgency may also be created by indicating there is a limited supply. Scarcity imparts a fear of loss on part of the purchaser.
ICOs are risky because of the lack of full information. There are no regulations specifying the amount of disclosure required that would enable investors to make informed decisions.
I have seen a number of business opportunities including cryptocurrency programs that lacked sufficient information.
For example, I have seen anonymous sales pages or have “talking head” or celebrity promoting a product. It is probably a scam. Scammers tend to hide behind anonymity to avoid contact with potential victims. Or hide previous criminal activity in the case of AriseBank.
Another scam warning is promoters using techo mumble jumble to describe their product of service. They make it sound so good yet offer no proof of validation. Fraudsters typically hide their fraud behind a smokescreen of technical or complex terms.
But then if you must invest in ICOs, consider the following investment tips.
Initial Coin Offering Investment Tips
When it comes to investing in initial coin offerings, the operative word is PRUDENCE. I suggest the following tips to help with your investment:
- Do your homework, research, due diligence to determine whether the investment is appropriate.
- Manage your expectations. An old Wall Street saying goes like this, “Bulls and bears make money. Pigs get slaughtered.”
- Don’t invest more than you can afford to lose. I personally expect to lose it all. So my digital currency investments are small.
- Expect price volatility, big swings both up and down. This is the result of the amount of fraud, particularly pump-and-dump schemes, in the digital currency exchanges. (So much for digital currency market self-regulation.)
However you decide to invest, I wish you the best of success. Just be careful with the various types of cryptocurrency scams.
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