Our London correspondent Nick Ayton explores the darker and lighter sides of cryptocurrencies, the Blockchain and the emerging world of Initial Coin Offerings, “ICOs.”

Why are so many ICOs structured poorly with little or no chance of delivering anything for those who have invested? Or maybe it is the core ICO proposition that doesn’t really improve on what is currently available in the market, naively thinking that by adding decentralisation you immediately improve on things. Or maybe the project team creates the marketing hype that reaches out to investors and masks the reality of what is actually going on...

I have spoken to literally hundreds of ICO project owners and read through an equal amount of White Papers. So why are there so few genuinely good ICOs are coming forward… Or is it because this new means of raising capital is attracting a greater number of inexperienced, first time entrepreneurs that think they can raise the odd $10m on the strength of a ‘White Paper’…?

Why Bitcoin is the best Use Case there is…

We have a very successful peer to peer cryptocurrency called Bitcoin that is working as a payment rail, the use case is very clear and it works with high availability and uptime. It is a censorship resistant solution and it has proven to be robust despite the nest efforts of China and Jamie Dimon to damage it. The trend continues, the believers believe and the doubters sell and lose out.

We have a Blockchain, a decentralised computing breakthrough that supports Bitcoin which is the only smart contract operating at scale that really functions in a live production environment at scale thus far. Yes, Bitcoin is a smart contract…

Then we have Ethereum that started with a crash and bump of the DAO and then Parity Multi-Sig got hacked, and this wallet software was used by the bulk of ICOs, proving they are not so safe. The reality of Ethereum is it remains bug ridden and the network often falls over. Ether is pumped by ICOs and they keep coming and accelerating, I predict there will be 5000 to 10000 of them and regulation will not stop them, albeit the second wave is approaching.

Second Wave ICOs will bring in institutional money…

The inevitability of the regulation has to be accepted. Is it a good thing or bad? But then think of it this way. Raising capital is part of a Capital Market activity, much of which falls within various banking laws and regulations. Whilst these are generally old and crappy and seek to protect the banks not the customer, they are there and the law is behind it. As a Libertarian I don’t have to agree, but I do accept we have to navigate with what is before us. And avoiding regulation, dodging the law and denying your token is a security is not the answer.

Embracing regulation and working within in its framework, and much of it is a framework to interpretation will enable your ICO to be considered by institutional investors, sitting on trillions of dollars looking for decent returns. Any returns.

Blissful ignorance

"Are we seeing blissful ignorance on all sides, the entrepreneur and investors of what is really going on?"

Although it is still in the early days for the new capital markets world of ICO fund raising, and yes there are some great projects, the issue I have is there are too many really bad ones that are getting funded and will end up hurting us all.

It is in our collective interest to make sure we find the scammers and stop them. It is time to stop the poor ideas and weak concepts where the basic utility of the token doesn’t work for investor or the user. We have to stop people buying ‘crap coins’ and support great projects for you to put your crypto behind…

So when is a Good project a Great project?

Simply put, when it delivers for investors, when it delivers good for the people, for those less fortunate and the technology improves on what is already there, when it creates an entirely new ways of doing things and can open up new opportunities for social impact...

In the past few weeks I have been exposed to some really Ugly ICO projects, where entrepreneurs are indeed deluded and focus on the money. While other projects are just Bad, where the team behind it thinks they have solved a business problem when in fact they have added complexity and haven’t improved or solved the underlying business problem. But there are the genuine Good ones where the genius design of the concept of the token shines through delivering a truly outstanding project that has the potential to be the next big thing, the crypto-unicorn, that can change business and human behaviour for all time…

Ugly

When I say UGLY I mean UGLY. So what are the signs the ICO might not be what it seems, Ugly means…when the project owners are putting Lipstick on the Pig…that’s when…

Look, when the marketing is so slick, when everything looks amazing, you have to ask what are they hiding…? As with a publicly traded company’s Annual Report, the first rule of thumb is always the thicker the report the more lies, and the more issues they are hiding. The more pictures, facts and charts and complex diagrams, suggesting the possibility of a cover up, or when the entire board are fat balding 50+ white men smiling into the camera, then it is often time to sell, before the whole thing comes crashing down.

When you read the ICO project White Paper what is your first impression? Do you immediately think this is exciting I have to invest? Or are you not sure if you have understood it, even after reading it three or four times. Like where the tokenomics part suggests investors get a great deal but they can;t quite put their finger on what they are to get….

Is there that nagging thought that plays over in your head, and yet the pre sale seems to be selling like hot cakes… Do you ask is it me, have I missed something, am I stupid, what have others understood that I have not…or do you think that everyone has forgotten their senses and bought the hype, fallen for the flashy marketing and you want no part of it.

Remember crypto investors are mostly spending their gains and may not relate fiat value to the token they are buying….

It is always worthwhile to dig a little deeper if it all seems too good to be true, and you know what this means. Over the top marketing can be a warning sign. Is the use of funds part vague and management seem to be receiving a disproportionate amount of tokens for themselves? Are there provisions for investors, any protection whatsoever and how are the proceeds of the ICO to be handled? And don’t fall for Multi Sig argument because this is also not a strong solution and creates another set of issues.

And then there are those investors that fall for the fake news and the fake people. Is someone pumping it? A famous Boxer maybe or girl that fellated her boyfriend on video. Ask yourself has the project been mentioned on TV (CNBC), or mentioned by a billionaire.

Is it only popular because it is being pumped?

Bad

Then there are just Bad concepts where often a few geeks try to build something from scratch, to reinvent money, build a competitor to Bitcoin, tokenise everything of value, build a new economy and do all this from scratch… Really? Just take a breath and consider this. A few twenty something guys who have never run a business before are going to build something that has never been done before!

Not saying some won’t succeed but the odds are in my favour not yours or theirs. Most of these projects will remain vapourware projects and an endless journey of software releases until they simply run out of money or do another ICO… Blockchain is about computer science and the application of this technology to create new business structures, but nothing is guaranteed.

Projects are worse than Bad when the entrepreneurs are clueless, haven’t bothered to educate themselves on the basics of Cryptoland and think an ICO will deliver riches very quickly. A weak idea to start with is followed by a false belief they can launch a token with absolutely no money, no planning and limited knowledge of business on the basis of a White Paper that makes no sense. But they do exist and the real issue I have is some ICOs platforms will help them no matter what… They won't call them out, say no because they themselves will make money even on a poor concept.

Not only are these clueless people dangerous, they need to be exited from the market. These projects often spend a large chunk of the White Paper and website trying to convince themselves and investors their token is not a security. They have statements in their documentation under “terms” that declare their profit/dividend sharing token isn’t a security because we say it isn’t. It is written in the terms and we are explaining our profit paying token isn’t a financial product and they are not launching any kind of investment fund, it’s a special token and its OK for all investors to buy.

Other founders turn up with a concept of a product or service they have decided to put on the Blockchain, despite the fact it doesn’t need it, or benefit from having any decentralised ledger or data store. The token is invented to do something, but they can’t say what exactly. An Apps token, where investors get nothing? Oh cool, I will buy lots of them thanks?

Others concepts want to create new platforms that instead of delivering transparency and fairness, end up building another centralised authority or actually add extra layers of bureaucracy, naively introducing a single point of failure.

Look, if you want to launch a token explain why? Explain how? I had one set of entrepreneurs say they were going to mine a new token, but hadn’t described or understood they needed to have an underlying Blockchain?

And then there are the ones that are going to create a new cryptocurrency, reinvent Blockchain and create the first Blockchain unicorn, and do all this without a decent CTO or management team that has actually built something similar…

They want to issue tokens to create their project, but have no concept of transactions or the need to store information that will pass across the Ethereum or another network, or that they will be required to fork the code and build out their own version of the truth. It is utter madness what some are claiming. The delusion and derision is scary, the ignorance worrying and then they argue with you…

But then the average crypto investor doesn’t know or understand the tech, crypto or Blockchain and these entrepreneurs are reliant on this fact…and I don’t like it.

Good

But then I find the great projects, the ones that make me smile, and where I can’t stop thinking about them. And the real Good News is there are an increasingly larger number of great projects emerging that will start to drive out crap projects, where these projects are not only stronger in their concept, design and execution, but deliver extra aspects that include social impact, support for the people and create extraordinary consequences. And above all they have a chance to deliver for Investors!

A great project is one that when you read the White Paper it is immediately clear what you get, what they are trying to achieve and more often than not they have a proof of concept, an existing business model they are tokenising and can show real substance. A strong management team, great advisors, a solid understanding of the underlying technology and yes, they are structuring an ICO properly – requiring a degree of investor disclosure, based in a sensible jurisdiction.

Good projects are very clear of the tokens utility. They explain how you as an investor/holder can buy and sell, and where many have more than one token. A token that is a ramp for investors to join the project and a project or app token that is used (spent) to consume the product or services.

If you’re going to invest or buy a coin, at least explain how it will (may) outperform holding BTC and ETH which I doubt many will ever do. So why would someone invest? What do you they get? What benefit will be delivered, to whom?

Emerging Problem for Ether

The big problem on the horizon and not to many years away will be when lots of early ICOs don’t deliver and publically fail. What will happen to the price of Ether? The big ones who have raised $50m or $200m plus…with many who have the money have yet to deliver anything working.

ETH is pumped by the single biggest Use Case, ICOs….

Will some of these projects ever deliver? Taking years to build software…they have no real customers, no income and keep building… Will it work… What are they hiding… When can we see something…

In 2018 there is likely to be a massive spike in ICO activity, 5000 or 10000 new ICOs are expected and so the overall quality will matter hugely. There will be so much to choose from, projects where there are real customers and real revenues… It is time for the good money to follow good projects…

Dare I say ICO providers are now in the spotlight…

I feel very uncomfortable that some ICO platforms take any project regardless… Other ICO platforms have an ICO to raise money for their ICO platform…? I struggle with this and cannot understand why? What are the motives of the ICO platform providers…? Yes we want to make money that goes without saying, and why some like Chainstarter, TokenHub, CoinList make it difficult for projects to get their ICO away, unless it is done properly…

It concerns me there are now ICO platforms emerging weekly it seems…launched by teams that have no track record in Blockchain, let alone working on their own ICOs… This is another case for Good, Bad and Ugly as the first generation platforms that created the market will struggle in a new world of regulation, extra security and an Ethereum only approach that denies investors the chance to use other crypto currencies…and where a single receiving address and the use of multi sig creates many downstream issues and complexities for the ICO project…

First Law of Investing

Don’t invest in stuff you don’t understand…and this is where the crowd generally sits.

This stuff is computer science and it is complex…tokenomics don’t always work, and you don’t know until the concept is built and launched…

Do your research…focus on the utility of the token. What you get, how it works, how price/value is maintained, how liquid will it become, are there platform inflation issues, is there an on/off ramp to fiat…

Look at the ICO provider platform that support the project. Is it secure? Does it use a single address to receive funds (if so it can be hacked and you lose before things get going), does it pass compliance tests, can it handle AML/KYC and does it allow investors, the crowd and institutional.

Remember, remember, smart contracts are not smart, nor are they contracts an investor or the project owner can read.