On Today’s Episode of The Cryptoverse…

I want to do a deep dive into the state of the ICO market and share some insights that lead me to believe we have the paradigm completely wrong and how we can correct it.

So many of us have lost money in ICOs I want to explain exactly why that happened and how we can stop it from happening again.

This is a deep dive so it’s the only topic I’ll be covering in this video. I’d strongly advise you to eliminate all other distractions before absorbing this. I’ve put a lot of effort into this video with the explicit intention of saving you from future financial loss so do yourself a favour and concentrate on it.

Episode Transcript

So I originally titled this episode ‘2 Reasons To Pledge To ICOs + 1 BIG Reason Not To’

Pretty much all of what I’m going to say here is coming from me and my own observations. Let me start by giving you the 3 reasons so if that’s all you came for you can bounce out.

The two reasons to pledge to ICOs are:

Because you want to see the project see the light of day Because you want to actually use the product and are willing to pay upfront for them to build it

The big reason not to invest in ICOs is:

To make a financial return on investment

This is the major distinction I’d draw between IPOs and ICOs.

The two are often compared, but I’m really starting to think that’s a flawed comparison.

It’s flawed because IPOs are most definitely within the realm of investing money with the expectation of a financial return. That’s why they are considered securities.

ICOs were not born out of the IPO market. They were born out of the crowdfunding market.

When we look at it from that point of view, we can see why it’s not logical that anyone can expect a financial return on investment.

Let’s go further with that point.

For a moment let’s take crypto out of the equation and go back to how crowdfunding worked before ICOs.

Let’s go over to a Kickstarter project that has been fully funded:

This is a very small project with a fundraising goal of just £776 but it will help me illustrate the point perfectly.

The first thing to highlight is the language on Kickstarter. You’re referred to as a ‘backer’ not an investor.

Second, at no point do you ever think you’re going to get money back from the project.

That only happens if they fall short of their fundraising target. But once the project is on, it’s on, no going back.

So what do you get as an incentive to back the project?

“Perks”

Again the language is crucially important.

In this case there are perks of increasing value which unlock based on how much financial support you give to the project.

So a quick run through the perks….

But notice something else crucially important here.

What you get for your money is the product being proposed.

Thus, it will only appeal to the two groups of people I mentioned at the start:

People who believe in the project and want it to see the light of day, and People who want the product and are willing to pay upfront so that it can be created

The other key element of crowdfunding that is talked about less often is the benefit to the project founder.

The success or failure of a crowdfunding campaign is in my opinion one of the highest quality forms of market research.

It tells the project founder a lot about whether there is demand for their proposed product BEFORE they create it.

That is compared to the old wasteful model where you’d spend all the money developing and marketing the product, only to THEN find out there wasn’t a market for it. You lose all that time, energy and money.

Crowdfunding online means even niche product could find a small market of people that would provide the money to create it in exchange for the creation.

This market research element is one of the elements that has become grossly distorted in the ICO market.

Said explicitly, the success of an ICO campaign has absolutely NO bearing on how much demand there is for the product itself.

And this is where ICOs end up residing.

They’re not pure crowdfunding campaigns, neither are they IPOs.

This could have gone one of two ways.

It could have combined the best of both IPOs and crowdfunding to create massive innovation and abundance.

Or if could have ended up a no man’s land.

I may change my opinion on this at a later date when I gain more knowledge and experience but as I speak to you now, I believe they have ended up in no man’s land.

Here’s another question.

Do we honestly believe ICOs would have been so successful in raising money in 2017 if they stayed true to the crowdfunding model?

Do we honestly believe that if ICOs acted like kickstarter campaigns and appealed exclusively to:

People who wanted the product to see the light of day, and

People who genuinely wanted to use the product

If they only took money from those two groups, do we honestly think ANY of them would have hit their funding targets?

One or two of them just might yes, but 99% of them would not.

And those one or two that did make it would have been the very best ideas out of the lot.

So in that scenario, the whole ICO concept would have acted as a filtering mechanism, where the crowd voted on what was a good idea and what was not.

And I’ll say again, the reason this system broke down was because the vast major of the money coming into ICOs was coming from the IPO investor mindset, which we now know is a huge mistake.

So where do we go from here?

Well with the experience that I now have and having come to this awareness over the last year there is only one way to go, and that is back.

We must go back to the original crowdfunding paradigm where we only ever “back” projects never “invest” in them.

The ICOs themselves bear a lot of responsibility for misleading us because they are the ones referring to us as “investors” on their websites.

They are the ones retaining an allocation of tokens for themselves.

And they are the ones listing their coins on an exchange.

Here’s another big question.

Why would an ICO project ever want to retain a large number of tokens for themselves?

Under this new paradigm there is only one legitimate reason for them to do this… they want to use their own product and need tokens to pay for their usage.

That’s where the perks come in for ICOs, the main perk is that you get tokens to pay for your useable.

And that’s the true description of a utility token.

And we see that happening now don’t we?

We see increasingly that ICOs want to brand their token as a utility token…

But at the same time, retaining large number of tokens for themselves and making sure the tokens get listed on exchanges so those tokens acquire value.

Now, unfortunately, the tokens have to be listed on exchanges because otherwise future users of the product can’t pay for their usage of the system.

The question is: do tokens absolutely have to be listed on exchanges?

Couldn’t ICOs just issue tokens to their backers like they promised in the various perks?

Couldn’t the project then have a way of taking payment on their website with credit card and crypto for people who didn’t back the project but wanted to use the product?

That might cause us to cry centralisation, but not if a smart contract had control of all the tokens and sold them autonomously in exchange for crypto payments.

But what would the smart contract then do with those funds?

Transfer it to the developers I suppose so they could then continue to develop the project but without being able to corrupt the token economics.

That all sounds good, but there’s nothing stopping a token being listed on a peer to peer exchange and then traded that way.

While we can’t stop that, at least we wouldn’t be actively encouraging speculation on the token.

On top of that, going back to our Kickstarter project example:

This would be the same as someone selling their perk on the secondary market, which again would only be bought by someone who wanted to use the product.

This is most likely why ICO coins fall so far. They have to fall to their fundamental value.

The bottom is whatever level of demand there is for use of the actual product itself.

And the fact that so many ICO coins have fallen through the floor in price is proof that the vast majority of the money raised during the crowdfund was from group 3, people mistakenly investing for a financial return.

So this is now my position on ICOs.

I think they are an excellent tool, but they are only an evolution of crowdfunding.

ICOs are blockchain and cryptocurrency technology applied to the existing crowdfunding.

They are not a new financial instrument.

This is now the lens I am going to view ICOs through.

This is also now my standing advice to you regarding ICOs.

In Summary

You should only ever send money to an ICO when at least one of these criteria are satisfied:

You passionately believe that the product will be of great benefit to the world and are willing to donate your money so it can see the light of day You personally want to use the product being proposed and are willing to help fund its development in exchange for the use of the product at a later date

If you pledge money for any other reason you have a 98.8% statistical probability of losing all of it.

That figure is based on ICO research conducted by an organisation called BlockBeats

So let’s stop using language like “investing” in a project and go back to describing it as “backing” a project.

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