Flipping ICOs: The Hedge Fund Game Burns Honest Investors
Selling quickly after an ICO brings quick earnings, but also devalues the token and erodes trust.
ICOs sometimes start with a pre-sale campaign, usually reserved for large investors. Hedge funds may be exploiting that opportunity, buying up tokens at a discount and quickly shedding them on the markets, reported Bloomberg.
The trend echoes a practice of the Initial Public Offering (IPO) trend in the dot-com era, when funds would get preferential package deals.
"They are getting a discount because they are a big name, and they think it’s going to draw the retail investor. It’s the greater fools theory –- I’ll buy it if there’s someone who’s more of a fool than me," said Kyle Samani, a managing partner at Austin, Texas-based Multicoin Capital.
While ICOs managed to raise up to $3 billion's worth of funds this year, some users are left holding almost useless tokens. Exchanges quickly became overfilled, and new tokens are not easily sold, requiring a visit to decentralized exchanges.
Investing this way does not even require much due diligence- a lot of ICOs go through a brief price spike after trading starts.
Others believe venture capital has the more balanced approach, doing due diligence on the firm's business.
"Why are these my favorite? Well, the last group are able to leverage their knowledge from non-token firms to token firms, and can add governance with equity checks," wrote Etienne Brunet in a Medium post.
But at the moment, there is no telling who has bought into the pre-sale phase, and whether they trust the company to deliver a product or would prefer to sell quickly. ICOs may also serve Bitcoin or Ethereum whales, and some believe large holders of the leading cryptocurrency may be starting ICO projects just to park their holdings and receive additional tokens.
Large-scale ICO investments may also happen in secret meetings, especially for the Chinese market, where large-scale investors don't even need to supply gas fees to cut the line in ICOs.
While some ICOs allow for only small-scale investors to participate, others prefer to target themselves to funds and large buyers.
"This has been a problem in this industry, and one of the reasons why there is an overwhelming amount of low-grade ICOs being launched," said Lucas Nuzzi, A senior analyst at Digital Asset Research.
In other words, ICOs may be created just to benefit early participants in the pump-and-dump scheme.
But the dubious nature of ICOs and the restrictive regulations may give rise to another trend- pre-mined forks of Bitcoin, especially coming from the Chinese market, at least according to CNLedger, a prominent Twitter account in the cryptocurrency community:
As China has officially banned ICOs, we expect to see more forks coming from China with pre-mines, serving as a new way to raise funds.— cnLedger (@cnLedger) November 15, 2017
In any case, ICOs themselves are a whole different investment class compared to outright owning established coins and tokens.