You could turn $100 into a fortune!
That is why ICOs (Initial Coin Offerings) boomed last year. New projects launched their own digital tokens. Everyone wanted to get in on the bottom of a skyrocketing cryptocurrency.
Bitcoin easily fueled that desire. If you put $100 into Bitcoin in January of 2012, you would be sitting on over 200 grand now, assuming you didn’t get excited and sell when Bitcoin reached $1000, or $5000, or $10,000…
Cryptocurrencies are exciting. They have the potential to upend the entire financial sector. The blockchain and other technology underlying tokens will truly prove revolutionary. But that doesn’t mean you should throw caution to the wind and empty your savings account in favor of cryptocurrency speculations.
Last June 90% of ICOs reached their funding goals. But by the time November rolled around, fewer than 25% of ICOs hit their target.
The reason? The cryptomarket was flooded with crap. Everyone with an idea and some buzzwords threw together a half-assed whitepaper, a document that explains the technology and purpose of a cryptocurrency.
Ernst and Young found that a majority of whitepapers included basic errors and contradictions. Many lacked clear explanations about the project or even the purpose of the token.
White papers contain many clichés that attract inexperienced investors, with no reasonable justification for blockchain use…
► First project to unlock multibillion market of < … >
► Decentralized network that puts users in control/the driver’s seat
► We are creating a community/ecosystem/economy
► No corrupted central authority
► Creating a Web3
► Most undervalued token
Most ICOs were just selling an idea. They had no business yet, and the capabilities of the founders were generally untested.
84% of projects launching Initial Coin Offerings analyzed by Ernst and Young were in the idea stage. 11% had prototypes, and just 5% were in operation.
32% of projects did not even specify when their project would go live.
From Bitcoin to Shitcoin
The risk in cryptocurrencies include projects that are crap, outright scams, and hackers/ thieves.
Hackers stole 10% of ICO funds last year, about $370 million. That doesn’t mean the cryptocurrency itself was a scam. It means hackers were able to steal from the speculators or the ICO project itself.
Most common was phishing, where a fraudulent email is sent to an account holder. The user follows a link and enters a password on a website which looks like the real thing.
Hackers also replaced the destination wallet address of an ICO with their own, so that speculators sent their payments to the hacker instead of the project.
But theft might not even be the biggest risk of speculating in cryptos. Sometimes the creators are incompetent or exaggerate their expertise.
Many ICOs use smart contracts. These are supposed to automatically execute agreements. But contrary to popular belief, smart contracts are not actually magic.
Hidden terms. Smart contract code can contain hidden terms that are not explicitly disclosed to investors
Unsafe algorithms. Insufficient testing of smart contract code, as well as the use of external public libraries, can lead to damaging consequences:
► Unintentional violation of smart contract logic through execution of a wrong order or number of functions used, as well as the use of nonstandard functions.
► Intentional influence on the smart contract logic with the purpose of breaking internal limits, for example, on funds withdrawal
Because tokens are currently fashionable, their value is not determined by the quality of a project. Instead, Ernst and Young found that the main drivers behind token price are fear of missing out, hype, and selling techniques.
However, they did find that the quality of a whitepaper also factors into the valuation of a cryptocurrency. A quality whitepaper could be a sign of a detail-oriented and intelligent team. Or it could mean they spent their development money on good copywriting instead of project development.
What to do?
Don’t take this as a warning to avoid cryptocurrencies. I hold some cryptocurrencies.
Part of it is philosophical, I want to see serious reform in the financial sector. Cryptocurrencies are in their infancy but have the potential to hand the power of the bankers back to individuals.
But I’ll admit I also would love to multiply my money. Early adopters take a risk by throwing their support behind cryptocurrencies. Some might be rewarded for that risk.
But the risk is substantial. The money I have in cryptocurrency is money I could watch burn, and my life wouldn’t change. Sure, I’d be upset. But it is not rent money. Do not speculate with money you cannot afford to lose.
Take a look at the whitepaper. It might not tell the whole story, but it’s a place to start. Use your critical thinking skills to make an educated guess about the potential for the project. Do some research, see what other informed people are saying about it–not what the sales team is saying.
And then protect yourself from hackers. For cryptocurrencies like Bitcoin and Ethereum, you can, and should, store them on an offline hardware wallet, (and don’t buy it on eBay or secondhand!).
For currencies kept on an online exchange, use two-factor authentification. This requires a second type of verification beyond just a password, usually using your smartphone.
Be careful with email links, it is always better to go directly to the website. (Sometimes exchanges might send a verification email when signing in, but your password should be entered before you get the email, not after following the link.)
Diversify. Don’t keep all your eggs in one basket. Hold different currencies. Split up currencies on different exchanges, in different wallets, and different types of wallets.
Most of all, don’t let FOMO, fear of missing out, drive your cryptocurrency trades. Ernst and Young suggest this is the main driver of cryptocurrency valuations right now, and that is not good!
ICOs have become a synonym for hype, unjustified valuations and excessive risk. On the other
hand, blockchain can increase project transparency, decrease investor risk and develop into an
effective financing tool for quality blockchain projects.
Don’t use emotion, use information. You can find some solid speculations if you are patient, keep your eyes open, and keep a level head. But don’t let the craze get the better of you!