Financial Markets to Crypto Markets, History Repeats Itself…again
When I was first introduced to ICOs as a capital-raising tool, I was instantly fascinated. I noticed that the majority of ICOs produced an amazing return for early stage investors, but I struggled to find quality information to determine which were worth investing in.
In the traditional world of finance we have a huge amount of resources available to help us research an opportunity. For example, the IPO process is highly-regulated, regulators approve the offering, terms are clearly defined and backed by a legal structure. Most important, the guys you are dealing with have licences, qualifications and are accountable…in most circumstances.
This was not always the case in the world of equities — in fact, the IPO market developed very similarly to the ICO markets. Let’s go on a little walk down Memory Lane and see just how similar the developing crypto market is to the traditional markets we seek to disrupt…
Coffee shops, the East India Company and your local whale
Many of us might think IPOs were started on Wall Street by JP Morgan and his crew, but the reality is that these guys are relative newcomers to the show. The first IPO was issued in Amsterdam in the 1600s by the East India Company. This issue was direct to market, they owned the exchange and it was purpose built for that listing.
The East India ICO was actually more of an index then a stock, as it encompassed a variety of companies or, in this case, ships. The story goes like this: in the 1600s imports from Asia were all the rage…tea, spices, silk, gold, you name it, Europe could not have enough of it. If you were a switched-on investor in those days and wanted “in” on this business you simply helped finance the voyage. When the ship you backed landed back in Europe — the goods were sold and everyone made money, at least in theory.
The reality was somewhat different. in the 1600s shipping had some issues and many ships never made it to port. The ocean was not such a friendly place back then — pirates, bad navigation, wars, drunk sailors, mutiny all took their toll on investors’ profits. Win some, lose some…so they say. Luckily, the market came up with a clever solution. Simply pool all the ships together, get the government to recognise your monopoly and pay out a dividend to all shareholders. BOOM, now you have instant diversification. Obviously the fund raise was pretty significant, so it was not as easy as ringing up a few friends, so a new method was devised: a “public stock offering”. The issuance of the East India Company share certificates not only created a quasi governmental agency that ruled trade for the better part of a century, it started a new financial movement.
The East India offering was not so different to any ICO or IPO today. Issuers often favour the wealthy. Think I’m wrong? Try to open an account at Goldman and try to get an allocation on the next hot IPO. You won’t. The reality is it is simply easier to sell your shares to 1,000 investors then 1,000,000 and today it is a nice way for bankers to reward customers that generate a lot of revenue in commissions.
So, like today, the big investors got the lion’s share of the East India Company. On the IPO the East India company issued about $100,000,000 worth of stock (in today’s dollars), to the grand total of…1,143 investors! It did not take long for those Barons to flip their shares to many smaller traders, creating a secondary market frenzy to “get in” on the action.
Enter the coffee shop!
In stark contrast to large investors, the small time investor is automatically disadvantaged — why? Simple, lack of information. Large investors or “whales” as we call them in crypto, get the best deals, they get the inside calls with founders and know what will pump before it pumps. Due to buying power they can move the markets and the smaller investors are left trying to get scraps of information to trade on.
So smaller traders tried to get an advantage and quickly started what we would call trading clubs. Back in the 1600s, traders would hang around Amsterdam coffee shops (as they do today, but for different reasons — those imports had not arrived yet!). At the coffee shops traders would spend time discussing stocks. Traders developed mini “exchanges” in the coffee shops with brokers that would buy and sell shares and settle at the main exchange later.
What is interesting for us to note is that when these traders combined their resources they actually had more power to move the market than the exchange itself. As a collective they became powerful influencers. However, that did not stop manipulators from using these groups to their own advantage often spreading rumours to pump stocks they got on the cheap, or for a fee from large shareholders or the company itself.
Enter the telegram group:
The similarities of the old trading world in Amsterdam to what we see in the crypto trading space is amazing. Today big whales get the lion’s share of new offerings, smaller investors try to get an advantage by joining private groups, often with individuals promoting their own purposes.
Today’s traders, myself included, are drawn to groups, simply because we don’t have any other source of information. Some take the approach that any information is better then no information, and many have made a good profit by buying the rumour and selling the news. The same market manipulation that existed in the 17th century continues to this day.
Market manipulation 101:
Spreading rumours, one coffeehouse at a time, was surely a slow way to reach large numbers of traders and it was virtually impossible to remain anonymous. Today, the clever manipulator has several means of influencing opinion and staying anonymous, which is the danger we see in crypto. It happens fast, and its the last ones in that end up holding the bag.
Its usually done like this:
Step one: Gain access to a large number of potential investors, as cheaply as possible. This is achieved easily with various social media tools — especially anonymous platforms… simply join a bunch of groups and, appearing to be a influencer, give some good advice and build up trust. Many ICO marketers exist who are more than happy to take a fee to assist!!! Regardless of the quality of the ICO itself.
Step two: Scale, make sure the rumour is duplicated over and over to many different groups. Again, achieved by building a network of influencers/manipulators, they usually tend to know each other. Some traders will surely make money on the pump or dump. Timothy Sykes built an entire training program around shorting over-hyped penny stocks.
Step three: Time, you must make sure the rumour spreads fast in order to get the pump going and exit. The longer you wait the higher the risk the lie will be exposed. In crypto, the most honest ICOs tend to be those that show their cards for a while prior to raising, but they also happen to be those that raise the least- which is a clear issue in the market now.
Step four: FOMO — make sure those that hear the rumour are motivated to act NOW, by limited offer or time sensitivity. TO THE MOON, limited time offer — 24 hours only…LAMBOS! Whatever.
And its pretty much rinse and repeat, again and again, until you are found out and have to make a new alias, easy enough.
And thats how it goes.
The reality is that we exist in an era where technology should be able to facilitate honest, structured, realtime and scalable investor intelligence. Quality projects receive the attention they deserve, while the losers should be washed out in the street.
Unfortunately, I can tell you that, in crypto, the more you spend on marketing the better your result will be, this might simply be due to increased awareness, but how can you tell it from manipulation?
The Solution:
I believe in ICOs, so much so that my colleagues and I have spent the last 9 months developing a solution to provide long term sustainability to this market. The way the industry has been working to promote ICOs has not been based on any solid methodology but rather hype, clever PR and marketing. Naturally that is not the case for all and very good projects exist which have obviously run strong promotional campaigns, that is not the issue. The issue is how to distinguish quality and encourage accountability.
I believe that ICOs are able to facilitate the dreams of many startups and have already generated tremendous value in the market. I wish ICOs existed 10 years ago, I would be a billionaire today without question.
To the naysayer, the uncomfortable truth is that ICOs have raised more money then any other capital raising tool developed in the last century. In that sense they are a revolution in itself. In 12 months ICOs have managed to raise nearly 4 billion USD, which for early stage startups is absolutely insane.
ICOs are often compared to venture capital, but I don’t think that is a fair comparison — why? Because ICOs are often pre-product, with just a basic proof of concept or just a really dedicated team that markets well. Good luck getting a VC to invest 10M on that. ICOs are almost like friends and family rounds at scale.
When you think about the risks and returns to date it has proved seriously impressive, but can this bubble pop? The fact is that not enough research is conducted prior to investing. I know this because it is clear that investors are buying in on FOMO. The incentive to hype an ICO is STRONG for all involved, justified or not.
All twenty of us at Ignite have been working hard to solve the above issues. Avoiding manipulation by generating sound investment intelligence is our goal, we have tried our best to not be a hyped ICO, but rather one that builds a solid grassroots community. Our goal is to help projects that deserve to raise millions from investors which seek to profit long term.
In short we are building the world’s first decentralised investment information portal, eventually to be packed with trading features only seen on Wall Street’s best trading desks. Ignite harnesses the power of its community and the wisdom of the crowd to intimately review and rate assets and upcoming projects in an honest and frank fashion, as we reward our community by allowing them to take the lion’s share of our own trading gains, executed on the back of their opinion. Any attempt to manipulate the system simply destroys that individual’s reputation on the platform, meaning that they will be unable to have any material influence on the ratings process and will lose the opportunity to be financially rewarded for their participation.
The Ignite community works as a collective to seek out the best investments, while freely-distributing its research amongst the community members. We believe in ICOs, and we believe that Ignite will help them become a legitimate and sustainable source of funding for 21st century projects, while helping to prevent history from repeating itself again and again.
Ignite RATINGS is the first decentralised ratings platform for digital assets, ICOs and cryptocurrencies. Learn more about how you can get involved at:
Christopher Cousins, Co-CEO & Founder
