The ICO Ponzi Scheme

Look at my new coin, it is a super strong financial system, with yadda yadda payments, and an ecosystem of amazingness. Buy into my ICO now, and get a 20% bonus on the initial value.

You may have seen things like this popping up all over the crypto-verse lately. And the reason for this is simple. A new cryptocoin is relatively easy to develop on an existing network (most use Ethereum), and because of the boom of the crypto industry, it's relatively easy to generate hype for your new coin and get investors. But many ICOs are, to put it simply, Ponzi schemes, with no actual blockchain development, or at least a barebones implementation. Here's an example:

A developer wants to develop a copycat coin any of the simple financial altcoins. Maybe it has a few extra features, or they promise extra support and promise to use it in one particular way. They start up a spiffy looking website, and an ICO (Initial Coin Offering). Usually they state something like "buy into the ICO and get a 20% bonus on your investment when the coin launches". They will attract investors hoping for the next Ripple, or Nextcoin. These investors usually don't invest much (to them), but there might be a few whales in there to help the hype.

But behind the scenes, there is no blockchain activity, no "real" technology at work. Maybe a glorified excel spreadsheet of who holds what.

Next, the coin goes live, and trading starts on a few of the exchanges that the developer can make deals with. Maybe Bittrex will pick it up. The initial value starts going up, causing more people to invest, allowing the initial developer (who has most of the coins) to hype up the project even more, claiming how much the ICO investors have increased their investment. But then, disaster happens.

There are no corporations willing to use the new coin in their ecosystems because a better coin already exists. Or someone finds out what's behind the curtain of this new coin: nothing. So there is no intrinsic value. After the price plateaus, investors begin selling the coin off (sometimes starting with the developer), and it's a race to sell all of the coins before the price plummets to zero. If you are late to the run on the bank, you are left holding the bag, as it usually is in the end of a Ponzi scheme.

So be extra careful when investing in a new coin that seems to have rising popularity from out of nowhere. Research the coin, and any features it might have. Ask yourself "does this coin have intrinsic value beyond a currency". Is it trying something new, like Steem, Sia, or Augur? Or is it simply a "financial ecosystem"?

This has been Alavan, thanks for reading