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ICO investments are inherently flawed. I simply do not understand why anyone would throw significant money at a startup without them providing legal equity in t

ICO investments are inherently flawed. I simply do not understand why anyone would throw significant money at a startup without them providing legal equity in their company. Sure, the value of their coin may rise for a while, but if they are successful enough, some of them will get acquired by a large corporation with no interest in their cryptocurrency; and they may even get absorbed into an existing product of the corp. This would leave a coin on the market with the name of a company that doesn't even exist.

cslarson 9y ago
The risk of that happening depends on how dependent the functioning of the token is on the company that held the ICO. It's precisely why the effort to decentralise governance for the project and give token holders influence is such a crucial consideration when investing. Unfortunately it seems there has not been too much pressure recently for projects to incorporate decentralised governance models.
mathgenius 9y ago
It's musical chairs: just don't be the last one standing when the music stops.
- lettergram 9y ago
  We call that a Ponzi scheme...
  - jiggunjer 9y ago
    A pyramid. A ponzi is more abstract and could still reward the last people but be harmful to the rest.
    - jstarfish 9y ago
      I like to think of it as a reverse funnel system.
    - nerfhammer 9y ago
      Also, a Ponzi scheme involves outright fraud, giving your investors fake accounts.
- sschueller 9y ago
  Like regular startup investments theses days... I don't want the be the one holding Uber stock after IPO.
  - charlesdm 9y ago
    That would be your pension fund, said bag holder.
golergka 9y ago
What if you have millions of unlaundered cash that you have no idea what to do with?
- subroutine 9y ago
  You pump and dump cryptocoins.
  - mark024 9y ago
    is quite hard if not impossible to buy bitcoins without kyc/aml not to say all transactions will stay forever, I think people who buy bitcoins buy for inflationary risks.
imaginenore 9y ago
You can make that argument about regular stocks too. When you buy a stock, you're not really getting any equity, not any share of the profits. You do get the indirect benefits, mostly through other people believing in the success of the company, buying the stock, and pushing its price. And occasionally dividends, but not many companies distribute them.
- kgwgk 9y ago
  Yes, you get equity. What do you think shares represent?
  - imaginenore 9y ago
    You're confusing common stock (what most people buy) and preferred stock. The common stock doesn't entitle you to the dividends of the profits, it only gives you the voting rights. The preferred one does. Common stock is also shielded against liabilities, as in it can go to zero, but can't go negative. Equity can. Common stocks are really strange, they are much closer to tokens, than to actual pieces of the company.
    - kgwgk 9y ago
      That’s so wrong I don’t know where to start.
    - Hambonetasty 9y ago
      Completely incorrect.
    - subroutine 9y ago
      This isn't exactly like trading the common stock of Exon or IBM; ICO purchases are early investors pouring money into completely unknown companies. If you're about to put in $100k into a seed-round startup, you should require a convertible note, or major shares (since pre-money the company should be valued near zero). I can only think that people pouring tens of thousands into an ICO and only want tokens, which are legally meaningless, are either seriously misinformed or they are laundering cash. But to your point about common stock, even when a publicly traded company undergoes a buy-out, they will require their purchaser to pay a premium on their current stock price ('current' typically meaning average over the last few months). As an example, if they are currently trading at $20 per share, they will require the purchaser to pay $30 per share to acquire. Once this is announced the common stock price will jump to the buyout price; at which point major investors of even common stock get a significant return. The reason for the jump is because the purchasing company will either payout cash or the stock will convert into the new parent company's stock. On the other hand, who knows what happens with tokens upon acquisition; there is no legal obligation whatsoever.
nugget 9y ago
Why do people trade OTC penny stocks of small companies that are almost all deeply flawed with continual share dilution and little to no prospect of future viability? I see ICOs as the more hip cousin of the OTC penny stock. 1 in 50 will turn into a real business and support the narrative that this is legitimate investing and lottery-style wins are possible. The rest will be traded up and down for speculation and entertainment, most eventually headed to 0, to be replaced in a continual cycle by new ICOs with new operators, new narratives, and new speculators. The tech is different but the human nature it taps into is the same.
- snarf21 9y ago
  Right, at best this is gambling. At worst, it is a pyramid scheme in the offerings that never intend to ever really even try to make something of value.
  - CryptoPunk 9y ago
    At best it's seed investment. You seed 100 projects that show promise and hope one of them is a home run. VCs do something similar, with 90% of their investments failing. The quality of token investing really depends on the due diligence done and the investment strategy pursued by the token buyer.
    - aaron-lebo 9y ago
      The problem is when you have 100,000 amateur investors, the likelihood of due diligence drops pretty dramatically and the strategy usually consists of "this looks good".
kaffeemitsahne 9y ago
The idea is that the tokens you're buying have a purpose in the product that the ICO is for. You're mostly speculating that the product will become popular in the future, and so there will be a demand for these tokens.
- deepGem 9y ago
  That's an assumption. For some companies such as Augur, this is true and they even enforce that the tokens be used for placing predictive bets. You can't just buy the token and keep it in cold storage. I don't see how a crypto token can be associated to something like a browser. Someone is betting that the browser becomes a sellable product. Very unlikely. I am surely missing something, because Brendan Eich is no ordinary person.
nadam 9y ago
Bitcoin is an example of a coin 'left on the market' in such a state that the original author maybe does not 'exist' anymore. If the codebase is open source, if there is a decentralized autonomous organization behind the project, or even just some kind of community, then the protocol can live on. Cryptotokens will not be companies. They will be some combination of companies, religions, protocols, memes... (Maybe churches are similar?) Reading the comments here I find that what most people do not understand is that the fact that 99% of ICO-s at the moment are crap does not really matter. What matters is the innovation that the 1% of the cryptotokens bring. If you follow the spce closely, you will see that there is plenty of innovation in the space both technical both organizational (like the DAO of DASH). Some years later dumb investors will give up investing in the space and only the sophisticated projects remain with sophisticated smart contracts and oracle networks so that for smart people I think there will be even more guarantees than in today's venture investing. And the real win will be the awful amount of middlemen eliminated. (All kind of lawyers, VCs, accredited investors, etc...). Venture funding will finally become meritocrtic, and not the privilege of some already well connected rich people.
- QAPereo 9y ago
  This sounds like typical utopian thinking, "Most of the present is an atrocity, but the future will be bright and perfect, so no sacrifice is too great today!" Who cares if 99% of ICO's are scams, and people get ripped off if it drives innovation you believe will change the world?
  - nadam 9y ago
    Not bright and perfect, just more efficient and meritocratic in most regards. (Similar to pre-internet vs. post internet: we made progress with the internet, and we will make even more progress with blockchain tech.) The reason that so many people are ripped off with scammy ICOs is that they were not allowed to invest into early stage stuff up until now, and they are extremely thirsty because of that. I don't think the solution is to filter by the old model. I don't think that filtering by any means is morally correct: people above 18 years should not be disallowed to invest into whatever they want. Our moral obligation is to warn them and teach them, but it is not ok to forcefully disallow them. Especially because some of them might be actually smarter then some of the VCs out there.
QML 9y ago
ICOs — a form of business model — are not inherently flawed. What is flawed are people's abilities to separate signal from noise, which given the technality and speculation of these projects make sense. Additionally, ICOs are not necessarily for companies. That seems to be a recent trend. Before that, ICOs were for protocols or open source projects to raise funding for development. For example, Ethereum is not a company but had an ICO. People participated because they wanted the protocol construction to continue.

cslarson 9y ago

The risk of that happening depends on how dependent the functioning of the token is on the company that held the ICO. It's precisely why the effort to decentralise governance for the project and give token holders influence is such a crucial consideration when investing. Unfortunately it seems there has not been too much pressure recently for projects to incorporate decentralised governance models.

mathgenius 9y ago

It's musical chairs: just don't be the last one standing when the music stops.

lettergram 9y ago
We call that a Ponzi scheme...
- jiggunjer 9y ago
  A pyramid. A ponzi is more abstract and could still reward the last people but be harmful to the rest.
  - jstarfish 9y ago
    I like to think of it as a reverse funnel system.
  - nerfhammer 9y ago
    Also, a Ponzi scheme involves outright fraud, giving your investors fake accounts.
sschueller 9y ago
Like regular startup investments theses days... I don't want the be the one holding Uber stock after IPO.
- charlesdm 9y ago
  That would be your pension fund, said bag holder.

golergka 9y ago

What if you have millions of unlaundered cash that you have no idea what to do with?

subroutine 9y ago
You pump and dump cryptocoins.
- mark024 9y ago
  is quite hard if not impossible to buy bitcoins without kyc/aml not to say all transactions will stay forever, I think people who buy bitcoins buy for inflationary risks.

imaginenore 9y ago

You can make that argument about regular stocks too. When you buy a stock, you're not really getting any equity, not any share of the profits. You do get the indirect benefits, mostly through other people believing in the success of the company, buying the stock, and pushing its price. And occasionally dividends, but not many companies distribute them.

kgwgk 9y ago
Yes, you get equity. What do you think shares represent?
- imaginenore 9y ago
  You're confusing common stock (what most people buy) and preferred stock. The common stock doesn't entitle you to the dividends of the profits, it only gives you the voting rights. The preferred one does. Common stock is also shielded against liabilities, as in it can go to zero, but can't go negative. Equity can. Common stocks are really strange, they are much closer to tokens, than to actual pieces of the company.
  - kgwgk 9y ago
    That’s so wrong I don’t know where to start.
  - Hambonetasty 9y ago
    Completely incorrect.
  - subroutine 9y ago
    This isn't exactly like trading the common stock of Exon or IBM; ICO purchases are early investors pouring money into completely unknown companies. If you're about to put in $100k into a seed-round startup, you should require a convertible note, or major shares (since pre-money the company should be valued near zero). I can only think that people pouring tens of thousands into an ICO and only want tokens, which are legally meaningless, are either seriously misinformed or they are laundering cash. But to your point about common stock, even when a publicly traded company undergoes a buy-out, they will require their purchaser to pay a premium on their current stock price ('current' typically meaning average over the last few months). As an example, if they are currently trading at $20 per share, they will require the purchaser to pay $30 per share to acquire. Once this is announced the common stock price will jump to the buyout price; at which point major investors of even common stock get a significant return. The reason for the jump is because the purchasing company will either payout cash or the stock will convert into the new parent company's stock. On the other hand, who knows what happens with tokens upon acquisition; there is no legal obligation whatsoever.

nugget 9y ago

Why do people trade OTC penny stocks of small companies that are almost all deeply flawed with continual share dilution and little to no prospect of future viability? I see ICOs as the more hip cousin of the OTC penny stock. 1 in 50 will turn into a real business and support the narrative that this is legitimate investing and lottery-style wins are possible. The rest will be traded up and down for speculation and entertainment, most eventually headed to 0, to be replaced in a continual cycle by new ICOs with new operators, new narratives, and new speculators. The tech is different but the human nature it taps into is the same.

snarf21 9y ago
Right, at best this is gambling. At worst, it is a pyramid scheme in the offerings that never intend to ever really even try to make something of value.
- CryptoPunk 9y ago
  At best it's seed investment. You seed 100 projects that show promise and hope one of them is a home run. VCs do something similar, with 90% of their investments failing. The quality of token investing really depends on the due diligence done and the investment strategy pursued by the token buyer.
  - aaron-lebo 9y ago
    The problem is when you have 100,000 amateur investors, the likelihood of due diligence drops pretty dramatically and the strategy usually consists of "this looks good".

kaffeemitsahne 9y ago

The idea is that the tokens you're buying have a purpose in the product that the ICO is for. You're mostly speculating that the product will become popular in the future, and so there will be a demand for these tokens.

deepGem 9y ago
That's an assumption. For some companies such as Augur, this is true and they even enforce that the tokens be used for placing predictive bets. You can't just buy the token and keep it in cold storage. I don't see how a crypto token can be associated to something like a browser. Someone is betting that the browser becomes a sellable product. Very unlikely. I am surely missing something, because Brendan Eich is no ordinary person.

nadam 9y ago

Bitcoin is an example of a coin 'left on the market' in such a state that the original author maybe does not 'exist' anymore. If the codebase is open source, if there is a decentralized autonomous organization behind the project, or even just some kind of community, then the protocol can live on. Cryptotokens will not be companies. They will be some combination of companies, religions, protocols, memes... (Maybe churches are similar?) Reading the comments here I find that what most people do not understand is that the fact that 99% of ICO-s at the moment are crap does not really matter. What matters is the innovation that the 1% of the cryptotokens bring. If you follow the spce closely, you will see that there is plenty of innovation in the space both technical both organizational (like the DAO of DASH). Some years later dumb investors will give up investing in the space and only the sophisticated projects remain with sophisticated smart contracts and oracle networks so that for smart people I think there will be even more guarantees than in today's venture investing. And the real win will be the awful amount of middlemen eliminated. (All kind of lawyers, VCs, accredited investors, etc...). Venture funding will finally become meritocrtic, and not the privilege of some already well connected rich people.

QAPereo 9y ago
This sounds like typical utopian thinking, "Most of the present is an atrocity, but the future will be bright and perfect, so no sacrifice is too great today!" Who cares if 99% of ICO's are scams, and people get ripped off if it drives innovation you believe will change the world?
- nadam 9y ago
  Not bright and perfect, just more efficient and meritocratic in most regards. (Similar to pre-internet vs. post internet: we made progress with the internet, and we will make even more progress with blockchain tech.) The reason that so many people are ripped off with scammy ICOs is that they were not allowed to invest into early stage stuff up until now, and they are extremely thirsty because of that. I don't think the solution is to filter by the old model. I don't think that filtering by any means is morally correct: people above 18 years should not be disallowed to invest into whatever they want. Our moral obligation is to warn them and teach them, but it is not ok to forcefully disallow them. Especially because some of them might be actually smarter then some of the VCs out there.

QML 9y ago

ICOs — a form of business model — are not inherently flawed. What is flawed are people's abilities to separate signal from noise, which given the technality and speculation of these projects make sense. Additionally, ICOs are not necessarily for companies. That seems to be a recent trend. Before that, ICOs were for protocols or open source projects to raise funding for development. For example, Ethereum is not a company but had an ICO. People participated because they wanted the protocol construction to continue.