Tuesday 26 September 2017

ICO's - a 19th century fraud for the 21st century

What is an ICO?

It is an Initial Coin Offering, coming off the back of the wild success of Bitcoin, there are literally hundreds of companies now marketing their own currency for you to buy instead of Dollars or Euros or even Pound Sterling if your desperate.

These offering basically allow you to buy early into a currency at a discount to future price. The idea being that Bitcoins could be bought for $20 as recently as six years ago, now they are going for $4000 dollars. As supply is limited by the blockchain and algorithmic programming backing them, you will be onto a winner if you buy early.

Hence the ICO's. The money from the ICO's is spent broadly on marketing the new-fangled currency. This is of course, by its very definition, a Ponzi-Scheme. There is no intrinsic value, just what the next fool is willing to pay. It is not even shiny like gold with alternate uses, it is just bits of data.

In 1817 we had the Poyais scandal, which was both a master fraud and a good allegory, a non-existent but promising new land was to be explored and financed by Bonds issued in London. Many people, desperate for yielding investments, joined in. OF course, there was no such place and fools were parted from their money.

ICO's are the same idea, they are playing on the success of bitcoin, which is different. There is no trust in bitcoin, the whole system is open, no one controls it - indeed the inventor fled into anonymity. There is no Bitcoin company owner making profits, these have been left for everyone else. It is indeed almost surreal.

The other ICO's all require the issuing company to do something in order for trades to happen, to take a margin in some way. Thus they are not really currencies and over time there will be a route for the owners of the company to hold to ransom the owners of THEIR currency.

It is a huge scandal this crypto-currency arena, not one I have yet touched although Bitcoin does stand out as different.


Anonymous said...

Are ICO's any different from the pound in your pocket?

There was a time when money was related to the output of a country - monetising the sweat of a a brow. But no longer.

Digital savings, currency and assets can be clipped like the old-fashioned coin clippers of old, at the press of a button. No wonder people are looking for "real" money.

Buying gold yet?

Steven_L said...

As supply is limited by the blockchain and algorithmic programming backing them

Really? Is there a limited supply of bitcoin derivative contracts IG Group will enter into with punters? What about bitcoin the ETN's I can buy via Hargreaves Lansdowne in my pension? Is there a limited amount of swaps the providers can enter into and therefore a limited amount of synthetic bitcoins investors can hoard? What's to prevent a bank or shadow bank taking bitcoin deposits and lending them out? And what about these so called 'forks' where 'the bitcoin community' basically decide to print more bitcoins? There's already a bitcoin for gold exchange where you can't take physical delivery of less than 100g. What if liquidity dries up because a big player or two decide to run off with the 'fiat'. What if these bitcoin for gold investors (or similar) all close their positions (i.e. sell gold and buy bitcoin) and the price has crashed so much they are owed more bitcoins than exist? Is there a limit to the number of bitcoin IOU's that can exist?

Yes I am bitter I never bothered to find out how to buy some bitcoins and make a little wager 5 years ago when I first read about it. But I honestly don't buy this limited supply thing.

ICO's are the same idea, they are playing on the success of bitcoin, which is different. There is no trust in bitcoin, the whole system is open, no one controls it - indeed the inventor fled into anonymity. There is no Bitcoin company owner making profits, these have been left for everyone else. It is indeed almost surreal.

It might be the case that no one person controls bitcoin, but there does appear to be an shadowy oligopoly of big players. Acting in concert these folk could easily control the price and the liquidity. From what I've seen, people who get sucked into this cryptomania have brainwashed themselves into believing 'fiat' (or 'money' as 99.9% of people see it) is intrinsically worthless and that their coins and tokens are a preserve of value. The exchanges seem to all be geared to make it very easy for participants to swap one kind of coin or token for another, but difficult to withdraw actually money. If 'fiat' is so worthless why are they all hellbent on stemming the outflow of it? All manner of offerings (ether, tether, ICO's etc) have sprung up, easy to buy for 'fiat' but not to easy to sell for 'fiat'.

I reckon that however well intentioned bitcoin might have been, it will all become a big multi-headed ponzi scheme. As long as the inflow of 'fiat' is there it'll carry on. But once enough participants decide they want their 'fiat' back to buy cars and houses with, I predict the big players will decide they prefer the 'fiat' after all and liquidity will vanish along with all the 'fiat' (or money as you, I and the people running the ponzi schemes would call it).

The funny thing is that most of the folk trading their coins and tokens probably never want to see their fiat again anyway. I think they genuinely believe that one day the local Ferrari dealer will be glad to accept them.

And I'd be interested to know of any of these bitcoin millionaires that have actually managed to get a 7 figure sum of fiat back out of the cryptosphere within the last month.

E-K said...

I thought cryptocurrencies *were* liquid.

E-K said...

I thought cryptocurrencies *were* liquid.

Anonymous said...

ICO's are an out and out scam, I've seen the sums the parasites advising on them want. Avoid!

As for cryptocurrencies having no intrinsic value, to be fair, neither does gold. It's value is mostly in perceived desirability. Even regular currencies are predicated on faith on that nation's economy rather than any objective value. Money is just a mechanism to provide value to units of work that are otherwise incomparable - how many lines of code is an apple worth? Who knows, but I can assign a value to an hour of my work, and a greengrocer can assign a value to an apple and money is the universal translation between the two.

I'm not convinced Bitcoin is the future, but I'm going to hedge my bets. There are a few wealthy people who got it in early, and then sold enough to retire on whilst retaining some.

Another new one Monero, can actually be mined via the web, there are already people injecting scripts into sites so they can mine it. Maybe you could have a play with it?

Steven_L said...

Gold is inert, malleable, visually attractive and conducts electricity well. It does have intrinsic value. 'Fiat' is indeed predicated on belief. But it's simple to use. Can you really see the public at large adopting something as complicated and as easy to irreversibly lose as bitcoin?

Timbo614 said...

I've been drinking but ...
Like fiat bitcoins don't really exist. There are no "bitcoins". Take away bitcoins or fiat and all the world's resources are still there to be traded.
Like fiat, these days, bitcoins are numbers in a computer (only 3%? of fiat is notes & actual coins). They are a means of exchange worlwide with no intervenng "trusted partner" needed to facilitate such a transafer of "funds" aka bits in a computer and thereofre no trusted-to-be-taken large fee. They are not (as useally rumoured completely anonymous.

The no trust part of bitcoins comes from "verifying-full-nodes" every movement(transaction) is logged by every full node. I run one. It costs me three quid a month for the 'lecky. It's a contribution to 1) verify my own receipts and 2) to negate the effect of a "large block" controlling the network ( as CU mentioned). To be clear my node contains every transaction ever processed since the beggining of the blockchain ( 146 Gigabyte currently if you must know).

There are fees and these are used to pay the "Miners" that assist with verification ( I hugely simplify). Disclosure: I have two Miners as well as a "full node".

ICO's are, I agree a rip-off/ponzi in the making because they are not pure blockchain thinking - they are more like risky shares or an IPO. But ETH(ereum) and some others are not even that - they are not really even a currency. They are a means of enforcing a series of events/contracts/obligations which can be proven by validating every singe step forever - the reality of blockchains - they store everything forever encryped and only revealable if you have the right key.

I actually think blockchains (rather than any paryiculat "coin/currency") will become a standard in the not too distant future.

I'm (obviously) having a punt :)

P.S. If you do buy/mine/obtain Bitcoins (or other crypto's) NEVER, NEVER lose that Key of yours - Mine is written down (in a safe) and on two Encryted USB drives - If you do lose it everything is gone and unrecoverable.

Cheers! Timbo.

Timbo614 said...

I said I'd been drinking - paryiculat is "particular" ;(

Anonymous said...

@Steven_L - perhaps I should've said historically.

Gold's actual usefulness is a fairly recent affair. It's isn't edible, not especially useful as a building material and any fool who figured it'd make nice armour was disabused of that notion at the first outing.

We gave it value based on its attractiveness. Which isn't objective or inherent, it's entirely perceptual. We basically set up a monetary system based on a bit of cerebral wiring we share with magpies.

And that's the whole thing about money we forget. It's the face of a mechanism of assigning value to wildly disparate things, codifying bartering with tokens representing a promise of exchange of goods, which we then, as humans are wont to do, we ran with and built all sorts of other mechanisms on top of.

Society cannot function without that mechanism, as it allows complex exchanges to take place - so rather than doing a 100 different transactions to get your heart surgeon a new car so he'll operate, all those transactions get abstracted away.

I'd argue money *shouldn't* have intrinsic value, it's a token representing value, not value in and of itself.

CityUnslicker said...

AM always pleased when I have been reading about something for ages and then the comments enlighten me further.

SL I am with you, I very nearly bought a lot of bitcoins a long time ago...the story of life repeated!

dearieme said...

Can you buy tulip bulbs with them?

Timbo614 said...

@ dearieme please send 1 bitcoin to:

and I will send you a box of tulip bulbs :)

Steven_L said...

We gave it value based on its attractiveness.

It's not just about attractiveness. Iron is attractive, but it rusts. Copper is attractive, but it turns green. Gold is inert, attractive, easy to work with and scarce.

I'm (obviously) having a punt :)

Well done on doing your research taking a risk Timbo, I hope it pays off for you. Do you plan on holding long term, until either they go out of fashion or become mainstream and you can fund your lifestyle with them?

Timbo614 said...

@SL: I don't have many yet this is a recent foray. At the moment the plan is long term. In relation to fiat currencies bitcoins are extremely volatile!

With my plan they will cost me next to nothing - and no I am not stealing the electricity! I am simply replacing the office heaters with mining computers - very nice heaters they make while mining :) if a tad noisy, winter is comimg. Capital investment has been 1K so far but this is for high power gaming cards which will retain some value provided I don't keep them too long. I'm also going to accept them for payment on one web site.

Wish me luck I'm probabaly going to need it.

Anonymous said...


I'm not denying any of those - mostly as I've actually worked with it - I'm pointing out its use, historically, places it having only value to the eye of the beholder. It had, until the electronics age, zero objective value as a material.

Even now, today, only 10% of its production is actually used in industry. The rest is for jewellery, other decorative purposes and investment.

That's the case because it's use cases are few and far between, and usually for advanced requirements such as satellites, with consumer electronics the only population-scale use I can think of.

For the majority of human history it's been valued because it's pretty and, as you say, scarce. That's not objectively useful. That's a reliance on a quirk of human nature.

andrew said...


also until s. america was discovered, the supply of new gold/silver did not increase much for some time (so gold price goes up)
acc to zerohedge.

The key takeaway for me is that gold _used_ to be money - i.e. the uk was on the gold standard until 1931 - so v.v. long term historic prices need to be viewed through that lens - and now it is not.

[as an aside - shamelessly quoting from wikipedia :
...Great Britain dropping the gold standard in 1931. This act "tore asunder" any remaining confidence in the banking system.[46] Financial historian Niall Ferguson wrote that what made the Great Depression truly 'great' was the European banking crisis of 1931.[47] According to Fed Chairman Marriner Eccles, the root cause was the concentration of wealth resulting in a stagnating or decreasing standard of living for the poor and middle class. These classes went into debt, producing the credit explosion of the 1920s. Eventually the debt load grew too heavy, resulting in the massive defaults and financial panics of the 1930s.

... sound familiar?]

Back to the point.

Since the 70's gold (and to a much lesser extent silver) is worth something around what it costs to mine and what people think it is worth.

The key message from me is
- BTC is worth what other people think it is worth on the interface between it and things you can buy. At the moment that looks like chinese RMB -> BTC -> USD where the money has not been declared to the govt. At some point things will change.

- There will not be more than 2-3 widely accepted crypto currencies

- The financial crisis is not over and owning BTC will not help you. Try spending BTC when the internet breaks.

Thud said...

Good luck to those who venture forth into crypto currency you are brver/smarter than me, I will stay with the old and steady, stocks etc...get rich slow seems to be my motto.