Cryptocurrency markets reward inaction and obfuscation

Posted: 28 March 2018 1:38 pm
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Projects can be 100% perfect as long as they never release a real world product.

A recent report from ICO Rating, commissioned by Bloomberg, has found that the worst ICOs are the best, and that markets actively reward projects that go nowhere and obfuscate their goals. These seemingly counter-intuitive findings probably shouldn't come as a surprise.

Cryptocurrency markets are largely driven by speculative hype, and there's no shortage of people looking to buy into the next big thing. There's no shortage of projects willing to oblige them either. Everywhere you go you'll find a dozen upcoming projects that promise to change the world, revolutionise something and deliver enormous returns.

Unfortunately it's much easier to promise earth-shattering changes than deliver them. By contrast, the most sensible and realistic ICOs that carefully set reasonable time frames and realistic expectations don't look too tempting. This has created a marketing arms race where projects need to knowingly over stretch and over promise just to look viable and attract funding.

What's a coin to do?

Some of the higher quality projects elect to quietly raise funds behind the scenes instead, while others might be launching their token onto the market knowing full well that they won't be able to keep their promises.

Here they have two options:

  1. Openly acknowledge that they have failed to meet their roadmap goals and that the promises they gave investors may have been false, and do the right thing by showing investors how their money is being spent.
  2. Scrape away the traces of those promises by removing whitepapers, concealing their progress or lack therof, and never disclose how money is being spent, all while assuring people that everything is on track and they're still going to change the world.

You can probably see why markets tend to reward option 2 and punish option 1.

Only the good die young

But at a certain point, a project needs to deliver some kind of product and make good on their promises. Unfortunately, this is not usually in their best interests. Hype can be perfect, but functional products have bugs, flaws and now need to actually fulfill some kind of function and compete in a market. They also become subject to the strain of fair real world valuation, rather than remaining free-floating speculative items.

The ICO Rating analysis found that the projects without any working projects did best in their first trading month on exchanges, while the vast majority of coin sales with testable projects slumped.

Bloomberg gives the example of Bancor Network, which last June raised $153 million in just a few hours and first hit the markets at a per coin price of about US$4.50. Since then it has mostly trended downward, and other than a price surge in December 2017, has spent its entire existence being priced below its ICO valuation.

This slump might be because Bancor went live with an actual product. Once it did, people could poke holes in it and realistically assess its usefulness next to traditional equivalent products. At the time of writing Bancor is ranked around number 98 by market cap, with a market cap of around $100 million.

On one hand this may not bode well for the monstrous Telegram ICO which is on track to enter the market with a multi-billion dollar valuation. On the other hand it has been widely criticised for having ambitious goals and no clear plan for achieving them. As long as it continues to successfully fail to achieve any goals, it might be able to maintain its initial valuation.

This also illustrates why the most useless coins are also the most potentially valuable. Bitcoin, for example, cannot do anything except be transferred. It doesn't actually serve any purpose except to carry some kind of equivalent monetary value. Three or four of the top five coins by market cap (Ethereum is the exception and Ripple is debateable) are simply featureless monetary tokens which serve no purpose except to be speculatively valued.

Because they have no real function they'll never disappoint.

Disclosure: At the time of writing the author holds ETH, IOTA, ICX, VEN, XLM, BTC, NANO

Disclaimer: This information should not be interpreted as an endorsement of cryptocurrency or any specific provider, service or offering. It is not a recommendation to trade. Cryptocurrencies are speculative, complex and involve significant risks – they are highly volatile and sensitive to secondary activity. Performance is unpredictable and past performance is no guarantee of future performance. Consider your own circumstances, and obtain your own advice, before relying on this information. You should also verify the nature of any product or service (including its legal status and relevant regulatory requirements) and consult the relevant Regulators' websites before making any decision. Finder, or the author, may have holdings in the cryptocurrencies discussed.

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