Why Most Cryptocurrencies and ICOs Fail.

Mar 01, 2019   |   by Emmanuel Lai   |   Thought Leaders & More

There has never been so much hype over a single class of technological developments since the dotcom bubble during the turn of the 20th century. Countless investors, many who may not have ever knew the difference between a public and private key, have put money into Bitcoin during the 2017-2018 bubble. Numerous ICOs have sprung up, offering eclectic solutions to everyday problems that people face. However, cryptocurrency has failed to deliver as a store of value due to poor market performance, and the overwhelming majority of ICOs failed to deliver the solutions they promised. What went wrong?

Lack of Standards

There is currently a severe lack of standard-setting organizations for blockchain.

During the birth of the internet, there were a number of competing protocols. Today, we take for granted the ability to view a website from any webbrowser. However, this not the case in the early 1990s, due to a lack of web design standards.

On October 1994, Tim Berners-Lee created the W3C, or World Wide Web Consortium. The W3C spearheaded the creation of a universal web development framework, providing unity to the world of the Internet. Web browsers began adopting his organization's protocols. This allowed the Internet to scale, and eventually grow into the behemoth that we can seamlessly access today.

While blockchain prides itself on being decentralized, it is not only possible, but critical to introduce standards and recommended best-practices. While developers should have the ultimate freedom to steer their technologies in the direction they wish, a set of standards can help produce code that is more scalable and easier to maintain.

Lack of Accountability

There is a shortage of accountability in the world of ICOs.

Around $8 billion was raised through ICOs in 2018. However, the world of ICOs is ridden with failed promises, disgruntled investors, and teams that simply did not deliver. Why is this?

Firstly, there is severe moral hazard in the world of ICOs.

What is moral hazard? It's where a party is able to take dangerous amounts of risk at someone else's expense, while reaping the rewards. This misalignment of incentives encourages teams to take unnecessary gambles at the cost of ICO investors.

The SEC regulates the exchange of securities. They set standards for publicly-traded stocks, corporate bonds, and other investment vehicles. Their power to impose penalties on officers of corporations disincentivizes fraud and dishonesty. While these regulations are far from perfect, they can bolster investor confidence and faith in the markets.

Many development teams have used ICOs to bypass SEC requirements. Traditionally, publicly-traded companies require the filings of audited documents such as 10-Ks and 10-Qs, which present investors with statements of cash flows, income, and a balance sheet. Without quality financial statements, there is no hard data that investors can use to sift through the hype, and accurately assess the progress and health of an ICO project. While the SEC has ruled in the past that certain ICOs are subject to the filing requirements of registered securities, much remains unclear.

Failure to Address a True Societal Need

There are hundreds of inane crypto projects that do not offer genuine solutions to societal issues. For example, the Useless Ethereum Token openly states that their token has no true use. However, its market cap was pumped to nearly $1 million during January 2018.

In addition to tokens that are outright devoid of any purpose or use, there are others that force a blockchain solution on issues that can be better resolved through other means. For example, the startup Viola.AI wants to use blockchain to start a dating site. While this is an incredibly intriguing proposal, I do not believe that their goals require the usage of distributed decentralization.

The Future

Despite the flaws in its current state, blockchain technology has an incredible future. The idea of democratizing transactions has tremendous potential for real-life applications in the world of finance and accounting. A blockchain is probably the best audit trail you can ask for, having an extremely high level of assurance against fraud. It allows people to send money between borders while incurring a very low transaction fee.

However, the technology is only in its infancy. I am confident that one day blockchain will be an integral part of society. Through the forces of creative destruction and competition, a few winners will emerge and achieve widespread adoption.

While we cannot predict what the future holds with absolute certainty, there are a few things you can ask yourself to increase your odds of picking the winning tokens.

Are the team members competent, or are they just into blockchain because it's the latest fad?

Put yourself in the position of an user. Does the token solve an everyday issue that people face, and are you sure that blockchain is the best way to implement the solution?

What are the roadblocks to widespread adoption, and how can they be overcome?

Though nothing is guaranteed, a project that answers those three questions satisfactorily has a much better chance of lasting the test of time.

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Emmanuel Lai