How the VC Cartel is destroying ICOs (Episode 1)

How did we get here?

Remember the time when people didn’t try to out dump each other? Exchanges nowadays look more like a Black Friday Market. Everybody ready to kill, out of fear getting dump on.

Its a phenomenon of 2018.

There are many reasons for this behavior. One of them is obviously the recession of over – 70% since January, however, I would make the argument that there is a deeper problem in the system. ICOs have outperformed the market by a long shot, most of them lost 95% of their value, leaving a lot of ICO Investors with heavy bags.

Before pointing fingers at people and call out Bullshit, lets first take a look at what potentially can give ICOs value and what can cause them to dump.

The three Pillars of ICOs

ICO investing is sadly all about speculation, and there are some indications that investors can use to help them decide between one project and another. Every influencer has a different weighting system but most if not all follow the same model:

• Team Experience in Related Field
• Type of Project (Potential Market Value)
• Token Metrics (Company Evaluation)  

People kind of realized not to invest in Dapps. It’s much too early and the potential market size is not that big. So the only projects that still are being funded, are infrastructure or cross-chain projects with a large backing of exchanges and famous funds/VCs.

Last but not least the Metrics. Token Metrics are more important than anything else and they are what makes ICOs fundamentally different to traditional stocks. With equity, there is a number of shares and you can buy a certain amount for a certain price. To provide additional clarity to investors, projects that want to sell securities to investors need to publish something called a prospectus. 

The reason we have that document is that before the Securities Act of 1933 a lot of shady stuff was going on. 

Exchanges, large funds abused their power to misguided mom and paps Investors. In easy terms, the prospectus is issued to give a degree of transparency in the project’s expenses to determine if it is operating efficiently enough for the investor’s taste. 

Ok now let’s look at how ICOs changed from 2017 and 2018.

The 4 stages of ICOs

Phase 1:

So back in 2017 a lot of things were different. It was still a great time when you could have breakfast watch some reviews go to the ICON ICO website, whitelist wait for the countdown to end put a few 100 of 1000s bucks inside, no VCs, no pools, no stress. I miss those times. 

There were much fewer investors that cared about ICOs enough to realize the potential of some of these things. Especially large funds and venture capitals did not know about the potential gains of ICOs. There was always a handful of respected VCs in the Blockchain startup space, but the real VCs crave only started flooding in around February of 2018. 

ICO investing was fun, if you were good at it you could have become a multi-millionaire quite easily, 10x returns were the norm and 100x ROIs happened several times a month. 

Phase 2:

After the start of the downtrend in January, EVERYBODY started to flood into the ICOs space, people that missed out on Bashillas100x projects all had the Goldrush. It became harder and harder to get into good projects and at some point, it was almost impossible to make it into the public sale of a top 10 ICO. It was around this time that we started to see the emergence of the presale pools. Everybody was high on the gold rush. Millions were lost in scammy pools or just sent to scammers in the telegram channels. It was the wild west of ICOs. ICOs started to decrease their public sale allocation and increased their private sale deals. Together with the pools, venture capitals started to flood ICOs.

I remember reading this early this year which got me super excited:

Today, I want to talk to you about a startling similarity that I’m seeing in the cryptocurrency market and the technology market of 1994 to 1995.

Now, what was interesting about 1994 to 1995 was that, even though the market was acting as if the opportunity in tech was over—very similar to the way this market is acting right now—what was interesting is that while stocks were going down, private investment and venture capital (VC) dollars were going up and they were going up a lot.

So, between 1994 and 1995, the whole Nasdaq got crushed. Companies like Oracle dropped like 50–60%; it was a blood bath. But you saw this huge increase in VC money coming into the market, like 30%. And $8 billion back in ’95 was a lot of money.

Generally speaking, VC money is very, very clever money, so normally when you see a market collapse, VCs run for the hills. But just like in ’94 and ’95—when the market did collapse and it was a horrible sell-off—we’re actually seeing VC money increase. So right now, VCs are on track to do 900 deals this year in the space, and last year, they did less than 300.

The pace of deal-making and the pace of money coming into the market is actually increasing, and it’s improving. That is an incredibly bullish sign for the long-term value of the market, because again, once you got through this 1995-kind of a debacle, you just had this massive bull market take place.

Ico investing started to become more difficult most project would go below ICO, but if you were good at picking the right ones you still had a decent chance at getting at least 500% returns days after their first exchange listing.

Phase 3

After a rough year in 2018, most ICO investors lost faith in the system. Its August of 2018, two of the most anticipated ICOs Atonomi and One ledger hit the exchanges and lose 70% of value. The last bit of hope that investors got destroyed. This was the beginning of phase 3 of ICOs. All ICOs dump hard on exchanges, not even the best projects have any chance of making any returns for their investors, well at least most of the investors. 

ICO investing became pointless. Most investors lost most if not all of their funds. Although investors became more educated and careful in their investment choices the returns were just as bad as getting into scams. 

So what the hell is going on? 

Lack of Liquidity:

There are several reasons for this steep decline. One of the leading forces was the lack of liquidity in the market. ICOs did extremely well because there were always traders around that were willing to trade the coin or token post exchange listing. Traders can’t be bothered with ICO investing. They prefer to trade the news, new listings and product wise progresses. No traders meant no profits. On top of that many, investors that used to be traders became ICO investors themselves, increasing the hardcaps and decreasing the buying pressure on the exchanges.

Too many shitty Projects:

In 2017 fewer projects listed on exchanges. There was simple less choice where to put your money into. So, more choice with less liquidity is a bad combination. A lot of ICO investors became bag holders of bad projects and simply left the space.

Massive Discounts and lack of Transparency:

Now, this is the one that everybody wants to hear about. Something interesting happened in 2018. Projects reduced their public sale allocation and increased their private sale allocation. Many ICOs thought its more beneficial to sell to a few large contributors than to decentralize their funding. Although it does defeated the purpose of building a Decentralized Application and an ICO to that matter, most projects preferred this method of fund raising.  

Venture Capitals flooded the space and started taking over most if not all of the Hardcaps for projects. Leaving retail investors with nothing more than an Airdrop for promotional purposes. The only way retail investors had a chance to get a piece of the cake was by joining a pool and hanging themselves to VC allocations, often sold for large premiums up to 200%. 

VCs realized a lot of profits could be made in reselling allocations, without any risks, the pool business was born. 100s of millions were resold, resulting in often 5 intermediaries between the ICO and the investor.

It was a mess.  

Venture Capitals have been in the business of making money and a lot of money was to be made in the ICO industry. Many realized that they could demand ridiculous discounts and lockups from projects and they usually would get it. As there are no clear guideline or regulations for ICOs, projects did not have to disclose any information to the public. The VC & Exchange Cartel would then continue to hype the project to investors until the project listing. Once on exchange VC & Funds would dump their tokens that they bought 10 times cheaper than the price on the exchanges on unknowing investors.

This was the beginning of Phase 4:

The Manufactured PUMP & DUMPS, being in the business of raising funds, instead of being in the business of building businesses.

Next Episode we will go through some manufactured PUMP & DUMP ICOs in detail, outline some of the “Bad Players” in the space and explain why it was something like this had to happen eventually.