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Why Initial Coin Offerings (ICO's) Are Vulnerable to Price Manipulation

Why ICO’s Are Vulnerable to Price Manipulation

The term “ICO” is one that is currently being used more and more in the cryptocurrency world. However, despite the rising popularity of ICO’s, many people are unaware of what exactly they are, and the inherent risks that come with investing in them. Here is a closer look at ICO’s, and why people who are considering investing in them should proceed with caution.

What is an ICO?

ICO stands for “initial coin offering.” An initial coin offering is very similar to an IPO, or an initial public offering by a company. The difference is that with an IPO, a company offers stocks for sale on a public market, and with an ICO a company offers digital tokens, or coins. However, despite the differences between an ICO and an IPO, both serve a similar purpose: to help generate funding for the company. Once ICO’s go live, the coins being offered can be bought and sold by members of the public.

Benefits of ICO’s

ICO’s have potential benefits for both the companies who offer them and for investors. The primary benefit of ICO’s for companies who offer them is that they can allow the company to gain access to capital which they may otherwise struggle to gain access to. Further, offering an ICO can be a great way to get the word out about a company, and to market the business.

Investors can benefit from ICO’s because many coins and tokens offered digitally go up in value over time. In this way, coins and tokens are very similar to stocks. So, people who invest in the right ICO’s could potentially see their investments generate substantial ROI’s. Some of the ICO’s that have been launched already have seen investors make breathtaking gains. In fact, the gains made by ICO’s such as Ethereum have been attracting a lot of attention. Ethereum was trading at less than a dollar just a few years ago. Now, in January, 2018, it is trading at just around $1,000.

Anyone who bought Ethereum around the time of its ICO made incredible gains. The same is true for many other ICO’s. It is the potential for remarkable gains that is currently attracting high levels of investors to IPO’s.

Why Are Companies Choosing ICO’s Instead of IPO’s?

There are several reasons why many companies are choosing to go the ICO route instead of the IPO route to obtain funding. The first is because it is often much faster. The second is because there is significantly less regulation surrounding ICO’s. In fact, there is very little regulation at all.

Essentially, raising money is less tedious and it can be a lot easier to create an ICO than it can be to create an IPO. If a company wants to create an IPO, there are many hoops that the company has to jump through to comply with government regulations and bank requirements.

Downside to ICO’s

The biggest downside of ICO’s is that they are vulnerable to fraud and price manipulation, especially when compared to stocks, bonds, and other securities. This is because there is that lack of regulation. So, some fraudsters and price manipulators view ICO’s as a way to scam people out of money and/or to manipulate coin prices in their favor.

Aside from that, ICO’s can struggle to generate the vast sums that can be generated by IPO’s at times because many mainstream private investors and institutional investors simply don’t trust them. So, that means that companies who launch IPO’s may not generate as much capital for their offering as they could have if they were to have launched an IPO instead.

How Exactly Are ICO’s Vulnerable to Price Manipulation?

ICO’s are especially vulnerable to the so-called “pump and dump” schemes. Pump and dump schemes are when a group of people all buy coins at the same time, which drives the price up. Once the price has been artificially inflated through this buying action, the group then sells at the inflated price. The result is that the group behind the pump and dump scheme
makes a significant profit right before the price crashes.

So, essentially, people who participate in pump and dump schemes can make a lot of money by manipulating prices. However, other people who own the coin that is being pumped and dumped can end up missing the selling point and still be holding the coins which rapidly drop in value. Anyone who is still holding the coins after the dump can lose a lot of money as the price falls.

In more regulated markets, such as the stock markets, regulatory agencies such as the SEC constantly monitor for pump and dump and other similar scams. This dramatically reduces the amount of price manipulation that goes on the start market. However, because the ICO markets are not well regulated at all, they are like a magnet for groups who wish to profit through immoral price manipulations.

Additional Vulnerabilities

In addition to being vulnerable to pump and dump schemes and price manipulation, ICO’s are also vulnerable to outright fraud. This is because it is possible for scammers to create fake companies and then launch ICO’s for them. So, people who buy into these ICO’s would essentially be investing in a company that doesn’t exist.

After such a fake company sells all of its fake ICO tokens, it can simply vanish. Anyone left holding the company coins would likely see the value of these coins drop to zero, resulting in total losses on the investment. This can potentially be devastating for investors who risk significant amounts of capitals on such ICO’s.

Confido is an example of such an ICO scam. Confido was a company that billed itself as a smart contracts startup. They raised $375,000 from their ICO phase. However, after it raised this money, the website and social media accounts for Confido were suddenly deleted. The value of the Confido coins then rapidly dropped from $1.20 to $0.02.

The result of this scam was that anyone who invested in Confido, and who purchased Confido coins in its ICO was left seeing his or her funds dwindle down to almost nothing. This scam is a perfect example of why ICO’s are still highly vulnerable to price manipulation and fraud.

Consequences of ICO Vulnerabilities

As a result of the problems with ICO’s, many countries have simply banned them, citing high risk to investors as the cause. China is one of the latest countries to ban ICO’s. It did so on September 4th, 2017. South Korea has also banned ICO’s. Many other nations allow them, but are monitoring them, and will possibly create heavier regulations on them in the near future.

Even in the United States, there is a good chance that ICO’s will start being regulated in the near future. The head of the SEC, Jay Clayton, has already spoken out in public, warning about the dangers of ICO’s. When you have the heads of major government regulatory agencies making public warnings about a particular market, there is a good chance that increased regulations could follow.

If the United States begins to heavily regulate ICO markets then there is a good chance that many other nations could soon follow suit. This is because America is one of the largest and most financially powerful nations in the world, and it is a trendsetter when it comes to policy in many cases.

How Might Stronger Regulations Impact ICO’s?

If ICO’s start getting heavily regulated, there are several different things that could happen. There are a number of positive things that could happen, and there are also a number of negative things that could happen. In terms of positive things, there could be less price manipulation, fewer fake ICO’s, and there could be an increased amount of investors who put capital into ICO’s. The increased capital from investors would come as a result of increased trust and lower risk of fraud due to heavier oversight.

In terms of negative things that could happen if ICO’s are regulated more heavily in the future, fewer businesses may consider launching ICO’s. Instead, they make seek alternative forms of funding. This is because regulations can be tedious and expensive to deal with. After all, the main reason why ICO’s have become a popular funding method in the first place is because there are far fewer regulatory hoops to jump through for businesses.

So, if the amount of regulations suddenly goes up, then it could send businesses away from ICO’s and into alternative funding strategies. It is possible that new funding methods could even be created to avoid regulations, just like ICO’s were created partly for this reason.

However, if new regulations are put on ICO’s, then it is highly likely that the market will simply adapt to them. This includes both investors and companies who will be launching ICO’s. Cryptocurrencies and ICO’s are rising steadily in popularity at the moment. So, it seems unlikely that the ICO market would suffer any strong or potentially dangerous consequences if a few regulations were applied to the market. However, these regulations could definitely remove a lot of the scam artists and price manipulators from the market. That could potentially help the market significantly.

Final Thoughts

Price manipulation and fraud in the ICO markets is something that is highly undesirable, and extremely immoral. Despite this fact, many people have attempted (and some have succeeded) to carry out pump and dump schemes, fake ICO’s, and other scams. This is just the reality of the current ICO market.

However, despite the risks associated with the current ICO market, there is still ample opportunity to be found in this market, for both investors and startups alike. In fact, many millionaires have already been created from the ICO market, and many startups have received enormous sums of money in funding by launching ICO’s.

Even though there are some viable opportunities within the ICO market, if you are planning on entering this market either as an investor or as a startup launching an ICO, then you should be careful. The ICO market is something like a modern day gold rush in the Wild West. There is a lot of ambition, risk taking, and scheming that takes place in this market.

If you can successfully navigate the risks and find great opportunities, then you could potentially make a lot of money in this market. However, if you fail to navigate the risks correctly, then you could also lose a substantial amount of money.

So, choose your ICO investments very carefully if you plan on buying some company tokens. If you plan on launching an ICO, then you should also be very careful to avoid the risks that go along with that as well.