Amidst the growing popularity of cryptocurrencies, the Financial Conduct Authority (FCA) has recently issued a warning that all potential investors should practice caution before spending money on initial coin offerings (ICOs), or risk losing their stake.
ICOs are similar to initial public offerings (IPOs) in that they are used to raise funds for web-based start-ups. Yet instead of raising money in conventional currency, investors pay in cryptocurrencies such as Bitcoin or Ether. After the investment, they receive a coin or token that is indicative of their share in the firm.
ICOs have gained popularity in recent months thanks to influential celebrities readily investing. Celebrities like Paris Hilton and Floyd Mayweather have publicized their investment, with Hilton especially tweeting that she was investing in LydianCoin.
— Paris Hilton (@ParisHilton) September 3, 2017
After the success of Bitcoin, many currencies tried to follow suit. Over the past few months, it is speculated that almost as much as £1bn has been invested into ICOs, with China being the center of activity. Yet with more restraint in the market around the world recently, Bitcoin value plunged from $4,950 to below $4,300. Although it has shown a substantial increase throughout the year.
The problem with ICO’s according to the FCA is that they are the high-risk investment and are based on pure speculation. In addition to this, ICOs are also unregulated, offer no protection to its investors, experienced severe price volatility, and has increased potential for fraud. FCA warned ICO white papers are also often misleading in its information.
The FCA is not alone in its warnings of caution. Financial institutions around the world have chimed in with the agreement, with the People’s Bank of China going as far as to ban ICO fundraising and other digital currencies, condemning it as illegal fundraising.
Despite these warnings, ICOs has reached feverish activity, particularly in China. In Beijing and Shanghai alone, 65 ICOs were launched during the last year, which raised £300m from 105,000 different investors.
Investors receive a substantial return on investment if the value of their coin or token goes up. Considering the success of Bitcoin and Ethereum, most investors have been prepared to throw caution to the wind.
Yet not all ICOs have been success stories. The most well-known failed ICO being arguably the Decentralised Autonomous Organisation (DAO), which lost $150m of investors’ money after it became vulnerable to its code and an anonymous attacker siphoned off with their funds.