First Lesson in Crypto-Investing — to know that you know nothing
Crypto-Assets have been around for quite a while now. Since Bitcoin’s creation in 2009, the number of crypto-assets has increased steadily. Currently, more than 1,500 coins and tokens are listed on Coinmarketcap valued at an aggregate of $400 billion, up 22 times since the beginning of 2017. Along with the explosion of crypto-prices in 2017, a lot of crypto-investment schemes have been launched offering investors a broad range of investment opportunities. Besides the general risk of failure typically associated with startups and new technologies, many of those crypto-investment schemes are questionable or straight frauds.
The largely unregulated crypto-investment landscape is shady and littered with dozens of fraudulent ventures. Additionally, even honest crypto-projects are not a safe haven for investors — as seen in the old FIAT world hackers attempt to cheat investors and steal cryptos. More than 10 percent of funds raised through ICOs are lost or stolen, according to a recent analysis from the accounting firm Ernst & Young.
Unfortunately, crypto-newbies are mostly driven by greed and hype and very often forget to “turn on their brain” which is for sure the best way to lose the money.
Those “wanna-be” crypto-millionaires just jump the boot because they heard of friends that became rich overnight or read some Facebook postings about the bright crypto-future. I would call them “super naive investors”.
There is one thing they should know: you (and most others) know nothing, literally nothing about the crypto-market.
Dealing with crypto means dealing with the Unknown. There is much “assuming” or “guessing” but for sure no “knowing”. You should not trust people that claim to “know”.
THE DAWN OF CRYPTO-ASSETS OR WELCOME TO THE NEW CASINO CAPITALISM
Rafael Delfin, Head of Research at the crypto-research company Brave New Coin published a great “General Taxonomy for Cryptographic Asset”. This taxonomy positions crypto-assets like Bitcoins (BTC) or Ether (ETH) as a new superclass of assets and aims to provide investors a guidance in understanding it. Reading this paper and other great publications around crypto-assets such as Chris Burniske’s Crypto-Investor’s Guide is highly recommended to investors to develop a better understanding about the nature of crypto-assets. This, in turn, is a conditio sine qua non before any crypto-investment.
Once, an investor grasped the basics about crypto-assets it’s important for him to understand how those new crypto-assets are sold on the market via different types of investment schemes.
To understand the new phenomena crypto-asset is one thing, the other thing is to choose the right “channel” when investing into crypto. For traditional assets, this is a rather easy task. The traditional (FIAT-bound) investment scene is supervised and regulated by experienced financial market authorities. The respective regulative frameworks are based on more than hundred years of experience and have digested myriads of fraudulent investment schemes. Hence, buying shares, bonds, gold or other commodities is usually done via regulated channels (banks, brokers, dealers etc.) with standardized (regulated) processes and thus the risk of being scammed or cheated is fairly low.
The situation is completely different when it comes to crypto. The crypto-investment market currently is characterized by:
- the absence of regulatory frameworks in almost any jurisdiction
- non-regulated, non-licensed, and not-registered issuers and/or promoters
- non-standardized investment offers without the required transparency
- a multi-cultural market with a very heterogeneous understanding of ethics, accountability, and responsibility
- bad actors and fraudulent schemes;
Let’ summarize: The “Jane or John Doe” investor knows next to nothing about crypto-assets, invests without a globally (or at least nationally) accepted regulatory standard in a multi-jurisdictional, and multi-cultural environment on a global scale.
The odds of winning in such an environment are probably worse than at the roulette table in the Casino. Crypto-Capitalism in its current state is definitely a sort of Casino-Capitalism for inexperienced investors:
The term casino capitalism refers to the unregulated excesses associated with the “boom and bust” cycles of large speculative ventures, such as Enron. Its origins in the literature probably lie with John Maynard Keynes (1883–1946) and his famous General Theory of Employment, Interest, and Money, first published in 1936. In this vigorous attack on the classical and neoclassical economics that was predominant at Cambridge in the 1930s, Keynes refers to the “casino capitalism” embodied in the winning and losing of fortunes on the stock market (Source: Encyclopedia.com)
At the Crypto42 Token Investment Summit 2018 in Vienna, the lawyer Ronald Frankl labeled this early crypto-investment environment as “Wonderland”. That’s exactly what it is with investors typically taking on the role of Alice.
LET’S SPEAK ABOUT THE CRYPTO-ASSET SALES CHANNELS
“Jane & John Doe” investors have to choose between some alternatives when investing into crypto. Basically, we can distinguish between two types of crypto-investments:
- Crypto-Assets: Coins, Tokens and mining server*
- Crypto-Derivatives: memberships in a private Crypto-MLM schemes, participations in crypto-pools or shares (equity) in trusts. They raise money from their investors to invest into Crypto-Assets.
(*) Crypto-purists and pundits will probably contradict our view to classify “mining servers” as a crypto-asset. One may argue that mining is just a tool to create crypto-assets which is undoubtedly correct. But for the purpose of this post (inform new crypto-investors) we think that a dedicated mining server can be classified as an asset if it is owned by the investor and the returns produced are paid directly to the investor. Furthermore, due to their standardized technology, fungibility, and available market prize they could be classified as commodity.
Definition Trust: A trust is a fiduciary relationship in which one party, known as a trustor, gives another party, the trustee, the right to hold title to property or assets for the benefit of a third party, the beneficiary. Trusts are established to provide legal protection for the trustor’s assets, to make sure those assets are distributed according to the wishes of the trustor.
Definition Crypto-Derivatives: A derivative is a contract between two parties which derives its value/price from an underlying asset. The most common types of derivatives are futures, options, forwards and swaps. Description: It is a financial instrument which derives its value/price from the underlying assets.
We don’t have any structured data and analysis yet (we work on that, promised) but based on the many reports we read we conclude that Crypto-MLMs currently are the predominant sales channel for crypto-assets to crypto-newbies. Yes, we are aware that ICOs and private token sale raised billions of dollars but mostly from experiences crypto-investors. Many Crypto-MLM systems are operated in a sort of “stealth mode”, i.e. memberships are sold in private events organized from sponsors and high-ranking members which receive a commission for the acquisition of new members. Just by looking at the collapsed Crytpo-MLMs such as the Indian GainBitcoin where more than 8,000 Indian and Asian investors allegedly lost some USD 330 million (adjusted for purchasing power via Big Mac Index Converter this equals some USD 618 million in the U.S.). In Austria, we saw the OPTIOMENT scam with up to 12,500 missing Bitcoins worth more than USD 100 million. Unfortunately, crypto-newbies tend to opt for the worst sales channel — Crypto-MLMs.
In Part 2 of our post we will provide a more detailed analysis of the different sales channels.
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