Is every Initial Coin Offering a Scam?

OK. Stop! Please, just stop! I get this question every day. More and more people asking about ICOs. I get it… I am an early Bitcoin user, I give blockchain presentations, I write a blog, and I work for a standards association. And so, this is my definitive response to a very pesky question.

Ron, in New York City reads this Blog. He asks this:

I work for an investment bank. Some banks, like Merrill Lynch, are hostile toward Bitcoin and other cryptocurrencies. Others, like Fidelity are dipping their toes in the water. And some, like Morgan Stanley speak with forxed tongue—condeming and hedging at the same time…

My employer is preparing to embrace Bitcoin with gusto. Once regulatory guidelines become clear and unified, we will offer crypto trading, options, futures and margin accounts. I am already working on customer literature and compliance training. We will also use crypto as money in all operations—to pay staff & consultants or purchase supplies & utilities We will even accept Bitcoin and Bitcoin Cash as payment from clients.

So, please tell me: Why does our in-house crypto expert constantly warn our managers and clients that ICOs are scams? How can she condem an emergent commodity? ICOs have sparked a massive new investment class. Are they really scams?

Listen up, Ron! Pay attention to your crypto expert. Follow her advice. With very few exceptions, ICOs are all scams, plain and simple.

Why are almost all ICOs scams?

Initial Coin Offerings are scams because of:

  • The way that they are promoted
  • What investors must do to profit
  • Their fundamental purpose: Dodge securities regulations, create MLM pyramids, or facilitate pump & dump. None are are sustainable, ethical or legitimate goals!

For those intent on using, investing in, or advising others on ICOs, this article explains how to discriminate a scam from a credible and functional instrument. Note the list of traits just below the red “Scam” button. If the ICO that you are evaluating exhibits even one of these characteristics, treat it like The Plague or the Mark of the Beast. It is most certainly a scam.

Note that ICOs are not Altcoins. There is a big difference. Altcoins are forked from Satoshi’s blockchain code. They are open source, license free, permissionless, with a transparent mining history going all the way back to the genesis block. The ownership of all pre-mined coins is known and auditable. There is absolutely no MLM aspect to an altcoin. If there is any central or authoritative component, it serves only to aid in quicker governance decisions or to overcome the energy overhead associated with Proof-of-Work. There is never another valid excuse for an authority, because authorities are chokepoints.

Many altcoins are legitimate projects designed to trade value, or serve as a functional component of an IOT (Internet-of-Things) process. This is also explained in the definitive guide to Why ICOs are almost all scams. Some of the IOT altcoins attract speculators and hoarders seeking to profit from trades. This is unfortunate, and it intereferes with the utility of the token (IOTA is a clear example). But, just as with Bitcoin, speculator interest doesn’t define a scam.

What about altcoins. Are they as toxic as ICOs?

Referring to my own definition, above, many altcoins—perhaps even most—are not scams. But, I am pretty picky on the altcoins that I recommend, because most of the clever features and functional improvements introduced by altcoins will be ripped and folded into Bitcoin. It is inevitable.

Apt metaphor for ICOs

After all, Bitcoin has an enormous lead, it has already achieved a two-sided network, and none of the altcoins are protected by patent, trade secrecy or opacity. By definition, they are free, transparent and without any licensing or proprietary features.

I was never burned by an ICO, but I have certainly consoled friends and colleageus who have been sucked into them. Unlike many columnists and consultants, I am not beholden to issuers. So, if your wondering what is an ICO? It is a puss-filled boil on your privates. You may quote me on that. The article linked above is honest, unbiased and definitive.


What sets cryptocurrencies apart from each other?

Today, I was asked to answer this question at Quora:

“What sets each cryptocurrency apart from the others?”

“Cryptocurrency” is a broad term. It refers to payment coins, of course—such as Bitcoin and Litecoin. But, because most tradeable tokens attain an asset value, the word is often used to refer to smart contract devices, such as Ethereum, a host of other blockchain based tokens, functional Internet-of-Things tokens, and even ICOs (Initial Coin Offerings). Since people treat ICOs and IOT tokens as investment instruments even if they are useless as a payment mechanism, they all fall within the realm of a cryptocurrency.

So, before addressing the question, let’s distinguish between Altcoins and ICOs. I assume the question refers to Altcoins, and not ICOs…

ICOs are almost all scams. A very few of these are designed to function in a well-defined IOT role (Internet-of-Things). But, any ICO that you are likely to hear about share one or more traits described here.

But Altcoins are different. These are typically forked from Bitcoin or another established blockchain-backed coin. They are created because developers feel that they have solved one or more of the problems that limit the growth or appeal of Bitcoin. For example, Bitcoin has (or recently had) all these problems or perceived limitations:

  • Transaction Malleability (Recently solved with activation of SegWit)
  • Speed of transaction (Now being addressed by Lightning Network)
  • Cost of transaction (Also addressed by Lightning Network early 2018)
  • Very high electrical demand by miners (Still a major problem)
  • Fairness of and speed of distributed governance process (a big problem)
  • Finding a validation incentive after mining runs out (a long term issue)
  • Deep privacy features. These are inherent to Monero and Zcash. (Bitcoin will soon support onion routing transactions to enhance privacy)
  • Disparate goals of miners, developers, vendors and users (still a problem)
  • Limited Smart Contract mechanism (Ethereum is the current king in this realm, with slick methods of administering and executing contracts. Bitcoin will eventually acquire these features & benefits.
  • Like ICOs (these are almost all scams), some Altcoins (not scams) address specific IOT applications. This is a legitimate and non-payment use of blockchain technology. It represents a promising evolution. It is not yet clear if Bitcoin can eventually adopt these features and function in a non-payment, IOT capacity. The intrinsic, stored value aspect of Bitcoin would make it difficult to use in such applications.

One big problem facing Bitcoin is that the distributed consensus mechanism that makes it a trusted, peer-to-peer mechanism is based on Proof-of-Work (POW). Coupled with a mining incentive that increases dramatically with exchange rate, Bitcoin is—quite simply—untenable. With consumption topping 33 terawatt hours in December 2017, it already consumes more power than some countries. If even 2% of the world’s payment transactions were settled in Bitcoin, the mining would consume more power than is generated throughout the world. This just cannot continue!

Fortunately, developers and armchair inventors have proposed or demonstrated clever POW alternatives to achieve a fair distributed consensus. Some of these use a Proof-of-Stake mechanism, while others add a limited central-authority nexus to facilitate governance and scaling. Some are built on a modified blockchain that weaken several pillars of a true decentralized, p2p network. Of course, researchers are concerned that these systems deteriorate the decentralized nature of Satoshi’s original blockchain.

But, other systems may allow for a fully distributed and democratic trust platform, such as BFT Replication (IBM) or Distributed Objective Consensus, which was proposed by an amateur mathematician.

In reply to the title question, Altcoins are set apart by their claim to address the above problems & limitations, or to add features.

Will an Altcoin Triumph over Bitcoin?

Perhaps, a few altcoins will thrive, due to specific niche advantages; features that Bitcoin chooses not to address, such as deep anonymity or with a novel utilitarian feature that facilitates a specific Internet-of-Things process.

Unfortunately for altcoins, all coins require public trust and transparency. For this reason, they are open source, permissionless, without licensing, without patent protection and with a fully disclosed pre-mining history. And for that reason, Bitcoin is free to steal any clever advantage that works. It’s all up for grabs and no one can be sued.

In effect, each altcoin as a beta test platform for Bitcoin. Now that Bitcoin is finally addressing the problems of scalability and fair/speedy governance, there is little doubt that it will continue to dwarf other coins.

Ellery Davies co-chairs CRYPSA, hosts the New York Bitcoin Event and is keynote speaker at Cryptocurrency Conferences around the world. Book a presentation or consulting engagement.

ICOs & altcoins rise and fall—yet, Bitcoin endures

At the end of 2017 and the first months of 2018, we witnessed a surge of interest in Initial Coin Offerings or ICOs. Perhaps the word “interest” gives too much credit to ICOs. Most are scams. ICOs are pushed through by vendor hype, rather than pulled through by investor research. They are almost all pump-and-dump schemes.

But what about Bitcoin? It is not a scam, but questions remain about regulation, intrinsic value* and its likelihood to be superseded by something better. Bitcoin skeptics point to two facts: (1) Bitcoin is open source, and so anyone can create an equally good altcoin. (2) Newer coins incorporate improvements that overcome governance and scaling issues: cost, transaction speed, the burgeoning electric needs of miners, or whatever…

While both statements are true, they miss the point. This is not a VHS-vs-Beta scenario. Bitcoin has achieved a 2-sided network and it is free to fold in every vetted improvement that comes along. For Bitcoin, all those other coins are simply beta tests.

Even the functional tokens will unwittingly feed their “improvements” into Bitcoin. For this reason, it is a safe bet that Bitcoin will reign supreme for years to come—perhaps even long enough for the dominos to fall.

Why I rarely consult to ICOs or prospective ICO investors

I recently presented at cryptocurrency expos in Dubai and Gujarat. As a result of these presentations, my organization now receives ICO pitch decks, white papers and business summaries—15 or 20 each week. About ⅔ are sent by investors asking for advice as an investment opportunity, while ⅓ are from issuers seeking accreditation from CRYPSA or at least a quote than can be used as a comfort statement.

The market potential for consulting to issuers and high-rolling investors is very alluring. Figuring that we could certify gems and advise the dogs (help them to create a more legitimate token), we put together a business plan to address a massive new consulting opportunity. But guess what?

… They are ALL dogs! That’s right! ICOs are scams. They are not the same as ‘altcoins’, which is a term more commonly used for open source forks of legitimate cryptocurrency platforms.

Now, the SEC has begun to investigate ICOs and for good reason. Most are thinly veiled scams to fleece widows and orphans by ducking under securities regulations. Others are MLM scams, proprietary mechanisms (in which founders or early partners hold all the cards), or they are simply poor/fake implementations of Blockchain services.

* How to spot an ICO scam (Hint: They are almost all scams!)

Few ICO tokens are credible, “functional” mechanisms that serve a purpose other than sheer speculation. What fraction are scams? More than 97% according CRYPSA.

To preserve our reputation, our organization has suspended a business unit created to endorse the few gems. Despite scores of applicants, we simply cannot find many worthy of accreditation, with the exception of a few Bitcoin forks. But, these forks are altcoins, and not really ICOs.

Nearly all ICOs that we analyzed fall into one of these categories…

  • Veiled securities offerings, designed to duck under securities regulations
  • Created for the express purpose of pump & dump (without clearly disclosing caps, reserves or pre-mined stakeholders)
  • A non-functioning coin that can only gain value through MLM. (This is not necessarily criminal, but outside our research and advisory mandate. Such coins are unlikely to provide value without quick, speculative trades and market timing that amounts to “dumb luck”).

So, what are the signs that an ICO is a scam? Is there anything you can do—short of hiring an expert—to evaluate each new proposal that comes along? We don’t advise or recommend holding such risky tokens—but for those attracted to the siren call of ICOs, here are six common tale tell signs that you are dealing with a scam:

  • If you received an announcement of an ‘Air drop’ or a coupon to get 25 or 50% bonus coins, it is a scam.  Stop and think: Walks like duck; talks like a duck.
  • If the value of coins is influenced by your ability to find new investors, it is a scam
  • If the coin is not based on Satoshi’s blockchain reference code, or is not open source, peer-to-peer and permissionless, then it is very likely a scam. (There are certain, limited exceptions)
  • If the coin is based on Tangle, then it is a scam—or at least, it is functionally useless—and therefore it is a bad investment risk
  • If the coin was pre-mined, then it is a scam. All mining by principals, insiders and early buyers must be disclosed and must be at least a full month after the first widely available public announcements
  • If any advertisement, announcement, affiliate contact or press release ends up in the hands of someone who did not independently contact the issuer for information and a prospectus, it is most definitely a scam

Are you like me?

Because most initial coin offerings exhibit these traits, I pass on opportunities to consult or present at organizations and conferences that cozy up to ICOs. This decision limits my participation at many crypto venues, but my conscience is clean and my Bitcoin future is secure.

Resist the siren call and keep your wits about you. You, too, can also avoid the illusory trap of ICOs. Run, hide or just ignore them. “These are not the coins that you are looking for.” (with apologies to Obi-Wan Kenobi and Alec Guinness).

* Related:

Ellery Davies chairs CRYPSA, publishes A Wild Duck and hosts the New York Bitcoin Event. He was featuerd at cryptocurrency conferences in Dubai, South Africa and India. Click Here to inquire about a presentation.

Could Bitcoin be Dethroned by an Altcoin?

Cryptocurrency aficionados have been discussing Bitcoin limitations ever since the blockchain buzz hit the street. Geeks toss around ideas for clearing transactions faster, resisting potential attacks, rewarding miners after the last coin is mined, and supporting anonymity (or the opposite—if you lean toward the darkaltcoins side). There are many areas in which Bitcoin could be improved, or made more conducive to one camp or another.

Distinguished Penn State professor, John Carroll, believes that Bitcoin may eventually be marginalized due to its early arrival. He believes that its limitations will eventually be overcome by newer “altcoins”, presumably with improved mechanisms.

So, does progress in any of these areas threaten the reigning champ? It’s unlikely…

More than any other individual, Andreas Antonopoulos is the face of Bitcoin. We discussed this very issue in the outer lobby of the MIT Bitcoin Expo at which he was keynote speaker (March 2015). Then, we discussed it again, when I hosted his presentation at The Bitcoin Event Andreas Antonopoulos-01sin New York (also in March). He clearly and succinctly explained to me why it is unlikely that an altcoin will replace Bitcoin as the dominant—and eventually surviving—cryptocurrency

It is not simply that Bitcoin was first or derived from Satoshi’s original paper, although this clearly established precedent, propelled it into the media, and ignited a grassroots industry. More importantly, Bitcoin is unlikely to be surpassed by an altcoin because:

  1. Bitcoin is open source. It is difficult enough for skeptics to accept that an open source protocol can be trusted. Users, businesses, banks, exchanges and governments may eventually trust a distributed, open source movement. After all, math is more trustworthy and less transient than governments. Math cannot inflate itself, bend to political winds, or print future generations into debt if it is tied to a cap. But it is unlikely that these same skeptics will allow an inventor with a proprietary mechanism to take custody of their wealth, or one in which the content of all wallets cannot be traced back to the origin.
  2. If we accept #1 (that a viable contender must be open source and either public or freely licensed), then Bitcoin developers or wallet vendors are free to incorporate the best protocols and enhancements from the alt-developers. They can gradually be folded into Bitcoin and adopted by consensus. This is what Gavin and the current developers at Bitcoin Prime do. They protect, enhance, extend, and promote. Looked at another way, when a feature or enhancement is blessed—and when 3 or 4 of the leading 7 wallets honor it, it becomes part of Bitcoin.

Bitcoin has achieved a two-sided network effect, just like Acrobat PDF. Unseating an entrenched two-sided network requires disruptive technology and implementation with clear benefits. But in the case of a widely distributed, trusted and universally adopted tool (such as a public-use monetary instrument), a contender must be open source. The Cryptocurrency Standards Association, The Bitcoin Foundation and the leading wallet vendors have always been open and eager to incorporate the best open source ideas into Bitcoin.

Even if Bitcoin were replaced by an altcoin or by “Bitcoin 2.0”, it is likely that the public would only migrate to the enhanced coin if it were tied to the original equity corpus of earned and mined coins from the Bitcoin era. That is, we all know that Satoshi may have thousands of original Bitcoins, but few among us would tolerate (a) losing all of our Bitcoin value, and (b) rewarding a blockchain wannabe who declares that his coins are worth more than the grassroots legacy of vested millions that came before.

string_can_phoneConsidering Prof Carroll’s analogy: “Who will use an acoustic string telephone when he could access a mobile phone.” A more accurate analogy is the evolution of the 32 year old AMPS phone network (the first widely deployed cell phone network). In 1983, the original phones were analogue and limited to 400 channels. Like their non-cellular predecessors, user equipment was bulky. Phones were divided into bulky components in the trunk, under the seat and a corded handset. They lacked GPS, LTE and many signaling features that we now take for granted. Yet carriers, equipment manufacturers and users were never forced to throw away equipment and start over. The network grew, adopted, and yielded incentives for incremental user-equipment upgrade.

With all due respect to the distinguished Penn State professor, John Carroll, Wild Ducks believe that Bitcoin need’t relinquish the throne. It is evolving!

Ellery is a board director of The Cryptocurrency Standards Association
This article was published simultaneously in the Lifeboat Foundation Blog

Related: Stellar & Ripple: Pretender to Bitcoin throne?