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Abu Dhabi, UAEMonday 25 June 2018

Rookie crypto investors are ignoring the risks

A recent Crypto Investor Show in London saw many hunting for the next cryptocurrency believing the sector is too hot to ignore

 

Illustration by Alex Belman
Illustration by Alex Belman

Dozens of stallholders, pitching anything from a happy retirement to commercial property to the future of electronics, set up shop in central London earlier this month to pitch their wares.

The companies and their salesmen were not there to part ways with the actual product, however. They just wanted to encourage buying into the digital coin craze that is raising billions of dollars.

At what organisers claimed to be Britain's first large-scale "Crypto Investor Show", attendees were looking to get in on the next initial coin offering (ICO).

The talk of Silicon Valley, ICOs are a mostly unregulated funding mechanism for start-ups to raise capital by creating and then issuing their own virtual coins or tokens. Last year, they raised a record sum as interest in cryptocurrencies like bitcoin surged.

"I came here to learn about ICOs. You have to do your research, but I would invest, it's the upcoming thing," said 30-year-old Shahzad Anwar, who installs electric charging points and had travelled down from the central England town of Solihull with his brother to attend.

"To me, stocks and shares and bonds are over, they are done," he said, as attendees listened to a pitch at a nearby stall for an ICO wanting to raise tens of millions of dollars to build and race a supercar. Another promised to build a network of rest homes for the elderly.

Regulators say ICOs are highly speculative and investors should be prepared to lose everything. Unlike stocks, most ICOs do not confer ownership rights in the underlying business, just the possibility that the tokens will be worth more in future.

Supporters say ICOs are revolutionising the capital-raising industry, a crowdfunding alternative that gives ordinary people the chance to invest in start-ups, normally the preserve of the venture capitalist elite.

From circulating on tiny online chatrooms a few years ago, cryptocurrencies and ICOs have moved to the mainstream, with public advertising common.

Some companies have pushed back, however. Facebook said it would ban all crypto adverts because of the risks to investors. Twitter said it was taking measures to prevent cryptocurrency-related accounts from running scams on its platform .

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London regularly hosts conferences on blockchain, the technology underpinning cryptocurrencies, where tech wizards exchange ideas, but the London show was geared towards the general public as well as experts.

The crowds arrived, some families for a day out, touring the stalls and listening to panelists. As well as marketing, there were sessions that discussed the risks.

Several attendees who worked in the industry said they were disappointed with the ICOs on offer, with staff hired for the day to hand out flyers and with little understanding of blockchain technology, or if it was even relevant to their idea.

"Don't fall for some of the marketing out there ... [You have to ask] is it actually solving a problem or is it just making one up?" said Linda Leaney at Globcoin, which claims to be a stable cryptocurrency backed by global currencies and gold.

One Leeds-based company, offering a token backed by commercial property, crypto trading and the founder's online discount shopping platform, said it had raised $4 million in seed investment, and was targeting $10m, with bonus tokens and referral awards for attendees that emailed their details.

Nearby, one programmer and salesman after another took to a small stage to explain their business. No company promised anyone a specific financial return, and aside from the price of each token and early-bird discounts, they stuck to talking up their product.

However, a global regulatory crackdown on cryptocurrencies created by startups to finance new projects could slow the pace of virtual currency sales as questions mount about their transparency and the risk of scams for investors.

More than 500 digital technology startups around the world have raised funds by selling their own cryptocurrencies, or tokens, that sidestep banks or venture capital firms as intermediaries.

The huge investment in the largely unregulated market, which began in 2009 with the launch of bitcoin and includes more than 1,200 tokens, has turned the financial world on its heels, especially as a stunning bitcoin rally in 2017 attracted speculators and stoked concerns about a bubble.

At the London event, Sam Smit, a 34-year-old electronics engineer from Horsham in the south of England, is a self-styled "dirty flipper" - someone who buys a token at the pre-ICO stage before token sales are opened to the general public, then sells them when they begin trading on an exchange.

"Have you seen `Wolf of Wall Street'? This is the same, pump and dump!" he said, referring to the 2013 film about the stock broker and convicted fraudster Jordan Belfort.

"People here are illiterate idiots. Often after the pre-ICO stage, it's already too late to buy," he said - while admitting that he had lost around $400,000 in January when cryptocurrency prices slumped.

Regulators around the world, led by the US Securities and Exchange Commission, have now issued rules or guidelines that are giving investors pause and delaying new offerings.

Analysts welcomed the respite, saying the market had spiraled out of control.

"We believe that regulation in the ICO space will filter out some of the nonsense in the marketplace and is part of the overall maturing of the crypto asset class," said Sam Lee, director of research at ICO advisory firm Strategic Coin in New York.

The SEC has cracked down on companies that have fraudulently solicited funds from investors claiming to invest the cash in virtual currencies or ICOs and sent several subpoenas to companies that raised large amounts of cash.