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5 "Tells" that the Stock Markets Are About to Reverse

Bitcoin Falls 20% as Mobius and Chinese Regulators Warn

Commodities / Gold and Silver 2017 Sep 06, 2017 - 05:53 AM GMT

By: GoldCore

Commodities

– Bitcoin falls 20% as Mobius and Chinese regulators warn
– “Cryptocurrencies are beginning to get out of control” – warns respected investor Mark Mobius
– Mobius believes governments will begin to clamp down on cryptocurrencies sparking rush to gold

– Yesterday China’s PBOC ruled Initial Coin Offerings (ICOs) are illegal and all related activity to halt
– China is home to majority of bitcoin miners
– Paris Hilton latest celebrity to support an ICO
– Gold’s return of 16% YTD look ‘dull’ or ‘stable’?

– Bitcoin fell 23%, now down 16% from $5,000 high


Editor: Mark O’Byrne

Bitcoin in USD 1 Year (Coindesk)

An ICO – “unregulated issuances of cryptocoins where investors can raise money in bitcoin or other [cryptocurrencies]”
Financial Times

Just as you thought you were getting your head around bitcoin and all the other hundreds of cryptocurrencies out there, the financial headlines are screaming at you about something called initial coin offerings or ICOs. Now you don’t really know what’s going on.

The latest news in the crypto world is that the People’s Bank of China (PBOC) announced yesterday that ICOs (Initial Coin Offering) are illegal and that all related fundraising activity should cease immediately.

But what is an ICO?

An ICO is like an IPO but kind of in reverse.  It is a tool that trades future cryptocoins in exchange for cryptocurrencies of immediate, liquid value. You exchange bitcoin or ethereum with the underlying company in exchange for a new token, say ‘ISawYouComing Coin’

A more formal explanation is offered by Travis Scher:

An ICO is a crowdsale of cryptographically secured blockchain tokens to fund the development and operation of one of three types of blockchain projects:

A platform-layer blockchain (such as ethereum or Lisk)

An organization that operates on a blockchain (known as a decentralized autonomous organization (‘DAO‘), or a centrally organized distributed entity (‘CODE‘)

A decentralized application (‘dapp’) that runs on a platform-layer blockchain. Tokens that fund these are sometimes known as appcoins. 

So far in 2017 $1.366 billion has been raised in ICOs. In global market terms they are still relatively small. But when you consider that US startups raised just $11 billion through IPOs in the second-quarter of this year then you can appreciate the rapid growth in the space.

The largest ICO so far this year has been by Tezos to fund its new blockchain tech which is still alpha testing. They raised $232 million worth of bitcoin (BTC) and ether (ETH) coins.

To be clear, to partake in an ICO does not automatically grant you ownership or shareholder rights to the underlying company, as would happen in an IPO. Instead you are exchanging money for a token that may or may not succeed in the future.

Given how many thousands of cryptos are currently competing with one another this is a real punt. Investors have to make sure they spend a huge amount of time researching the underlying blockchain, the market, the team etc. You should only go for an ICO if you have a very significant appetite for risk, no concerns about losing your capital and love a good flutter.

Sound little too new and Wild West? You’re not the only one who thinks so and there is plenty of evidence to back up your concerns.

There is no regulation ensuring that those offering the ICO do so in a responsible manner as per other fundraising activities.

A quick search of ICO fraud and you will be confronted with many articles (all from 2017) reporting on various ICO scams. Plus Paris Hilton has just jumped in on one…not to cast aspersions but, but, but…it is …

So what’s the deal? A $2bn+ fundraising market and no regulation?

In a brilliant report by Smith+Crown it is explained how the usual rules of fundraising can be avoided by ICOs:

Most ICOs today are marketed as ‘software presale tokens’ akin to giving early access to an online game to early supporters. In order to try to avoid legal requirements that come with any form of a security sale, many ICOs today use language such as ‘crowdsale’ or ‘donation’ instead of ICOs.

Don’t forget the bitcoin and cryptocurrency industry is also relatively unregulated. By allowing it to grow organically and without various regulatory restrictions we have seen major shakeouts in the industry and it has forced its members to pull up their socks and seek out regulation.

However ICOs are now at a point where they are no doubt attracting unsophisticated investors. I have met many people who are worried they have missed out ‘on the bitcoin thing’ and believe that by getting in on an ICO they might be getting ahead of the game.

These same people tend to know little about blockchain instead stating that it is ‘the next big thing’ and just have major FOMO.

Without regulation there is little protecting newbie investors.

What’s the difference between an ICO scam and all the other’s we’ve seen before now? Matt Levine of Bloomberg explains it perfectly:

‘an ICO scam is subtly different from a gold-mining scam in that, with an ICO scam, you can do a scam ICO. You don’t have to get a publicly listed company and pump and dump its stock: You can just say “I’m doing an ICO, here’s the address to send money,” and people will send you money if you have scammed them correctly. Lord knows, it happens often enough. This does not work as well with gold: You can’t say “I found some gold, please buy some,” because buyers will want to see the gold. (Well, there are gold scams like that, but they seem harder to pull off.) With an ICO you may have to write a white paper explaining your token, but the quality bar for that is low, certainly lower than faking up some bars of gold. Lower even, I would think, than faking up a public company, making false filings with the SEC, doing wash trades to pump the stock higher, and then dumping it at the right moment on unsuspecting buyers.’

The government clampdown

But this may now be about to come to an end. Seven-China based regulators took sweeping action against ICOs, putting both the practice and the future of the underlying tokens at risk.

A joint statement released by the regulators explained:

[ICO financing] 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.

Subsequent statements have ordered that all fundraising activity cease and all completed ICOs be refunded.

China is not the world’s biggest coin offering market but does account for 25% of the capital raised in the last year. There are 43 ICO platforms in China. By mid-July this year these platforms had raised 2.6 billion yuan ($399 million) from 105,000 investors.

The China decision is not totally unexpected and comes on the back of both the US and Canadian regulators voicing similar concerns about ICOs.

In the US the SEC has mentioned these potential ‘pump and dump schemes’ whilst the Canadians have suggested that ‘most ICOs need oversight.’ Both have referred to the tokens as potentially being ‘unlicensed securities.’

Just last week the SEC suspended trading of shares in four companies that had been talking up ICO-related activity. The four firms (First Bitcoin Capital Corp., CIAO Group, Strategic Global, and Sunshine Capital).

None of the four firms are currently big deals by any means but it didn’t stop them from announcing as such. CIAO Group, for example  announced a”$530 Billion [!!!] Blockchain and Cryptocurrency Target Market Collaboration” this summer.

A total scam

Not everyone running an ICO is out to scam you. One of the dangers of the press coverage is that its getting to be a little like the initial coverage of bitcoin, i.e. if you’re using it you must be a crook.

This is certainly not the case for all entrepreneurs offering an ICO. ICOs can be an easy way to raise money.  Even the SEC explained that not all ICOs are not intrinsically bad, stating that they “may provide fair and lawful investment opportunities.”

Anyone who has run a start-up knows how tough and time-consuming it is to raise capital. Should the ICO do well then the broad distribution of the token can provide some pretty powerful momentum for your business.

It is also an interesting way for the bitcoin millionaires to use their new-found wealth. In the same way we see Silicon Valley entrepreneurs re-invest their wealth into startups, we see a similar effect taking place in the crypto world.

However, they are unregulated with a serious lack of control regarding valuation, marketing and ethics.

Worse than the dot com bubble

We have seen a number of bubbles over the years, people still speak of the dot com bubble. Then of course there was the global real estate bubble that helped trigger this whole financial mess.

With both situations inexperienced investors thought they had found quick and easy ways to make money. This in itself isn’t how investing is supposed to work.

A recent Sovereign Man blog explained this well:

There’s a token issued by Stratis, for example, that is up 101,168% since its ICO last summer. The NXT token is up 672,989%.

Those are not type-o’s.

There’s another token that’s actually called “*****” which is up 370% in the last 24 hours.

The returns are absurd… especially considering the assets are priced in Ether or Bitcoin, which have also soared to all-time highs.

So on top of a 1,000% return in Bitcoin, ICO investors have also made a 100,000% return in the token.

But I’m hearing exactly the same cackling that I heard from the real estate bubble days more than a decade ago.

– It’s soooo easy to make money in ICOs. 
– It’s a foregone conclusion that the tokens will go up in value.

Sorry, but it just doesn’t compute.

If the tokens represent ownership in a business, then the only thing that matters is whether or not the underlying business performs well.

Does the company have a compelling long-term strategic plan?

More importantly– are the managers successfully implementing the plan and achieving milestones?

Is the company on a path to financial sustainability?

Nobody seems to be paying attention to these details. They just buy tokens with the expectation that the price will rise.

And even if a business performs well, it’s ridiculous to think that a startup company can be worth 100,000% more in a year. Or nearly 700,000% more in a couple of years.

To put these numbers in context, Peter Thiel invested $500,000 in Facebook back in 2004 as the company’s first big investor. In 2012 he sold most of it for $1 billion.

That’s a return of 200,000% in eight years… pretty tame by ICO standards.

Does gold look dull or just stable?

Earlier this year the bitcoin price surpassed that of gold for the first time. When it had previously reached parity with the precious metal it had subsequently experienced a fall back in price. Since then it has slowly but with major volatility recovered in price and reached a high of $5,000 last Saturday (Sept 2).

Bitcoin’s stellar performance has prompted some respected investors to suggest that gold will be replaced by either bitcoin or another cryptocurrency.

Many of the arguments for this surround the potential convenience of bitcoin plus the returns that investors have experienced over this period of time. Some have dubbed gold as ‘dull’ in comparison.

The problem is that one is bought by and trusted by central banks, the other isn’t. Not only that but the infrastructure forming around bitcoin and its contemporaries is making regulators increasingly nervous rather than reassured.

When governments get nervous about an industry it’s a bad sign for those hoping a cryptocurrency will succeed. In order to succeed a cryptocurrency needs a strong infrastructure surrounding it.

Legendary investor Mark Mobius believes this is good news for gold. He told Bloomberg:

“Cryptocurrencies are beginning to get out of control and it’s going to attract the attention of governments around the world,” Mobius said. “You’re going to get a reversion back to gold because people are going to wonder, can I really trust these currencies?”

Currently it isn’t so much the cryptocurrencies that are getting out of control but instead part of the infrastructure. However this in itself get people nervous and wondering if they can trust a crypto as a store of value and medium of exchange.

“People need a means of exchange and they need to trust that,” said Mobius, who was interviewed before China’s announcement. “Right now the trust is good — with bitcoin people are buying and selling it, they think it’s a reasonable market — but there will come a day when government crackdowns come in and you begin to see the currency come down.”

That day is here now.

Gold Prices (LBMA AM)

05 Sep: USD 1,331.15, GBP 1,029.51 & EUR 1,120.43 per ounce
04 Sep: USD 1,334.60, GBP 1,030.98 & EUR 1,120.53 per ounce
01 Sep: USD 1,318.40, GBP 1,020.18 & EUR 1,107.98 per ounce
31 Aug: USD 1,305.80, GBP 1,013.17 & EUR 1,098.31 per ounce
30 Aug: USD 1,310.60, GBP 1,014.93 & EUR 1,096.71 per ounce
29 Aug: USD 1,323.40, GBP 1,020.34 & EUR 1,097.36 per ounce
25 Aug: USD 1,287.05, GBP 1,003.90 & EUR 1,090.90 per ounce

Silver Prices (LBMA)

05 Sep: USD 17.88, GBP 13.80 & EUR 15.03 per ounce
04 Sep: USD 17.80, GBP 13.75 & EUR 14.95 per ounce
01 Sep: USD 17.50, GBP 13.53 & EUR 14.69 per ounce
31 Aug: USD 17.34, GBP 13.47 & EUR 14.62 per ounce
30 Aug: USD 17.44, GBP 13.49 & EUR 14.60 per ounce
29 Aug: USD 17.60, GBP 13.59 & EUR 14.62 per ounce
25 Aug: USD 17.02, GBP 13.26 & EUR 14.40 per ounce

Mark O'Byrne

Executive Director

This update can be found on the GoldCore blog here.

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