The dark side of the Blockchain and ICOs

While Jordan Belfort, a.k.a the ‘Wolf of Wall Street’, called initial coin offerings (ICOs) the “biggest scam ever” and the controversy with Tezos grabbed all the headlines, it’s a better time than ever for you to learn about cryptocurrencies and to safeguard against losing your investments.

Belfort, who spent time in prison for fraud and whose exploits were documented in the Hollywood film “Wolf of Wall Street”, knows a thing or two about pulling the wool over investors’ eyes for personal gains, even though he might not be a specialist in the highly secure nature of the Blockchain.

However, even though his opinion may not necessarily be an expert one, his comments have been realised to an extent in the recent Tezos controversy, where the founders were involved in a major fallout, which resulted in an indefinite delay on token trading.

That ICO has become the birthplace of a massive legal battlefield, as co-founders, Arthur and Kathleen Breitman fell out with president, Johann Gevers. Investors in the ICO are unsurprisingly concerned and seeking legal counsel. The investigation into the Tezos project seems to hint that the ICO violated securities laws and regulations and,  if that is the case, things will soon go from bad to worse for this project and all its investors.

This raises the concern that a lot of people don’t conduct due diligence before handing money to complete strangers. So, what does this mean for someone who is considering investing in an ICO, but is concerned about ending up in a similar messy situation or losing all of their money?

Cryptocurrencies and Blockchain technology are a relatively new concept and have become a major fad over the past year or so, with Bitcoin prices soaring to unprecedented levels, while altcoins like Ethereum and Litecoin are following suit (although to a lesser extent). $5 of Bitcoin seven years ago would be worth $4.4 million today and everyone is keen to jump on board with the latest ICO that could potentially reap similar rewards. However, not many people are educated on the new technologies and the radical changes that the Blockchain has brought to investors. And it’s easy to get lost when coming across jargon like “token offerings”, “whitelists”, “hard forks” and “bounty programs”, not to mention the various complexities that come with cryptography.

Until now, it’s been fairly easy to invest in stocks and other startups, because you can consult with experienced stockbrokers and attorneys, who have an understanding of market forces and legal issues that have precedent because they may have learned from past experiences, at university or another learning program. As of yet, theoretical knowledge of cryptocurrencies is almost non-existent. Therefore, the risks involved with investing in this brand-new field are incredibly high. However, the rewards can be monumental, as anybody that bought Bitcoin in 2010 will tell you today.

In essence, all you can really do is manage your risk and educate yourself as best you can. Seek legal counsel and consult with your financial advisor and see what advice they can offer you in terms of market forces and legislative safeguards. Most importantly, read the whole whitepaper or ask your advisors to do so for you.

What you need to look out for is a description of the product you’re buying through the token sale and, naturally, whether you think it is a good idea to invest in. Then you need to find out exactly how the token sale will be conducted, how the money will be distributed (% that goes to cofounders, CEOs, investors, early backers and the business itself), what the rollout plan is and when tokens will be exchanged in earnest, what the market cap and minimum targets are, how you will be refunded if the ICO fails, etc. You need to do your research and you need to make sure the company you’re investing in does theirs.

Like I said, ICOs, cryptocurrencies and the Blockchain are new fields and there isn’t much reading material out there for you, but you will always have information available to you in a whitepaper. Make sure it’s legit before you invest. Otherwise, like Mr Belfort explained and like the Tezos investors found out, you could be scammed. Let’s just hope that companies like Tezos don’t ruin the power that Blockchain and the distributed ledger is set to put in our hands and that will make the world a far better place.

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