Note: This article is from 2017.

Not all Initial Coin Offers (ICOs) are scams. Some are. Not all ICOs are bad investments. Some are. This is true of many investments. So none of those statements are useful. In the case of ICOs, it's going to be the ratio and the specifics. So instead I'm going to talk about one of the more significant issues with the ICO market today.

One area of regulation concerns the ICO process itself. This includes diligence on the claims of the originators. Another concern is outright fraud and theft. These are relevant topics, but for this article, I wanted to skip past that hurdle. The ICO is funded and ready to go.

Now the ICO is "live" and trading. But we're not out of the woods yet. In fact, this is where things can get the most interesting. The "live" token space is still relatively new. So this remains one of the less explored areas.

Tokens tend to have similar characteristics that open up Post-ICO hazards:

They are speculative, so that drives the whole bias of the system.

They can have low-trading volumes, particularly at the early stages.

You have small, high-stakes groups invested in that token's success.

They're often traded against other (volatile) tokens. This creates a sifting-sand effect. It also opens up complex arbitrage.

None of these are bad in themselves. However, it does create an environment that is ripe for market manipulation.

Low-volume trading makes the price easy to move in the first place. You can put a limited amount on the line to move the whole market. This is why low-volume Penny Stocks are a typical target for your classic stockmarket "Pump and Dump" scenario.

If you raised $10 Million at ICO, then you can theoretically buy back all the tokens and maintain the same price. In theory. That's only the baseline. By moving tokens back and forth, it's possible to step up the price.

You put $1,000 equivalent on the market and buy back at $1,100. And you've lost nothing in the process. In fact, your overall holding has just gone up 10%. If you're holding a $1 Million equivalent, you've made quite a return.

In a low-volume market, this isn't just by 10% here and there, it's by multiples. It's not possible to maintain this dance forever. However, that's just a matter of timing and creating the right buzz.

The parties who benefit the most are the token-issuers, plus early token holders. These are also the parties most able to control the early price of the token. It's a bull market without any bears to keep it in check.

This sounds extremely manipulative. That will happen. However, it doesn't even need to be deliberate or blatant fraud. It's possible to get this effect through sheer speculation and enthusiasm. This is particularly true when there is a smaller group with the same interests.

This can and will happen in regulated markets, but with at least some checks in place. It'll happen with greater gusto on less and unregulated ones.

True to Betteridge's Law of Headlines - No, this isn't a classic Ponzi scheme. It's not even a traditional Pump and Dump. But it shares at least some of the mechanics of both. Perhaps a new title is deserved.

A high-volume market provides a level of protection against this manipulation. It's not the ultimate protection, but it helps. Ironically, some transction fees also help. Exchange and brokerage bring in some friction. Exchanges also provide better access to liquidity.

The argument here is that early token trading is unwise. This is a tough call, as this is also where some of the most significant gains present themselves. Yet, holding a Million-equivalent in a token is not useful when you can only liquidate a few dollars a day. That's the potential trap.

The mechanics of the ICO matter. When the token is tradeable. Who gets what percentage of tokens. How further tokens get issued (mined) and how they get destroyed (burned). The sooner these use a standard format, the better.

Once you get Post-ICO there are other signs of a healthy token:

High trading volume.

A "stable" price for cryptocurrency is relative. That said, major daily step-changes are a hazard.

At a later stage, the stability that comes from a high turnover and a diversity of investors in the market.

Trading lockout or transparency for the foundation, organization and any founding parties.

The missing piece is that last one. Transparency of accounts. If you buy in to Unicorn Coin (UCOIN) it's reasonable to have a guard against UCOIN trading against itself. At the very least it needs to be transparent.

The lack of regulation is one of the more exciting aspects of ICOs. Actually, "regulation" is a red herring in that. It's more the unfettered access that is exciting about ICOs. If it shows anything, it's that there is a market for (highly) speculative investments.

In some circles, the prospect of regulation brings images of doom and gloom. A flowering ICO market crushed underfoot. However, the regulatory market that gets this right stands to benefit.

Caveat Emptor.