DCU - China Bans ICOs (5th Sep '17)

Market Performance (Global Market Cap):

  • 24-hour gains: -7.9%
  • September gains: -12.9%
  • Year to date gains: +753.7%

Portfolio Performance:

  • 24-hour gains: -5.2%
  • September gains: -8.3%
  • Year to date gains: +1,400.1%

China Bans ICOs

The market took another big hit overnight with China announcing they are banning ICOs. The Global Market Cap was at one point down -22% from the high of Friday but has rebounded back and is now -16% from the high of Saturday.

In summary:

ICO financing refers to the activity of an entity raising virtual currencies, such as bitcoin or ethereum, through illegally selling and distributing tokens. In essence, it is a kind of non-approved illegal open fund raising behavior, suspected of illegal sale tokens, illegal securities issuance and illegal fund-raising, financial fraud, pyramid schemes and other criminal activities.

You can read more about this at Coindesk here.

While the market reacted with a significant selloff, particularly hitting the likes of NEO -24%, EOS -27% and Qtum -28%, I think this is a good thing for the Crypto market. The ICO method of raising money was starting to get out of hand.

Companies have been raising hundreds of millions off the back of an idea, a flashy website, and a white paper and there is little in the of checks against how the money will be used and how it will be spent.

If you compare an ICO to traditional fundraising methods:

  • VC: there is no way any VC would invest in a $200m round for these projects based on their progress. Also, any company raising money this way would likely have people from the VC placed on the board, monitoring progress and providing guidance.
  • IPO: would only happen with an established company who has demonstrated growth and wants to raise further funds to accelerate the business. The company is then responsible for the market and will have to provide certain information publicly.

Once money has been raised through an ICO, where does it go? How is it spent? What come back is there for those managing the funds and building these businesses? 

Some are just massive scams to make money.

Another thing I don't like about ICOs is how the coins can be dumped by the original investors when they first hit the exchanges as the coin finds a market price.

When running a startup and trying to raise funds, VCs will want you to demonstrate you are making progress with your project before they invest. I prefer cryptocurrencies where the teams have put in the hard slog at the start with limited cash, where the price has been able to slowly grow in value. We have coins hitting the market and making top 10, +$1bn valuation in weeks.

It is madness. It is crap for the market, and it is crap for investors.

Decentralisation may be cool for some things, but government regulation is good for others. I am glad China has banned the ICO, and I hope other governments do.

How Will the Market React?

This new dip on top of the $5k retracement was bad timing, and now the market is having to price in two different events. There is a chance this may lead to a correction of sorts, similar to June/July. I was hoping to ride out Monday and Tuesday to see if the market would bounce back from the $5k Bitcoin retracement, but now I am going to ride out the rest of the week to see what happens.

I feel like I have missed the opportunity to take funds off the table for this dip as I have no idea whether this will blow over in a couple of days or not. My feeling is that this shouldn't lead to a significant correction as it is good news for the market. Equally, it may be a signal that a bigger correction is coming, like the dip we had on May 27th.

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I don't like to take money off the table when we are dropping, especially when prices are bouncing off resistance levels. We have also been here before when the Peoples Bank of China makes statements which negatively affect Crypto, and the market has always bounced back.

I feel like that when the market is getting bubbly that signals are given, usually in the form of an event triggering a selloff. I feel that today may be the signal for a bigger correction. We will just have to wait and see.