DeutschUntil a few years ago, there was exactly one cryptocurrency: Bitcoin. But with the big hype surrounding the “means of payment of the future”, many wanted to join in and so, depending on the source, there are already between 1,800 and over 4,000 different cryptocurrencies. Apart from Bitcoin, they all fall under the so-called altcoins, so they should offer an alternative to the pioneer Bitcoin. However, only a few have been a real alternative so far.
Nevertheless, new cryptocurrencies are constantly coming onto the market. Most of them are financed via a kind of crowdfunding: The founders collect capital in the form of central bank money and the investors receive brand new coins or tokens in return.
ICO vs. IPO
This first round of financing for digital currencies is called Initial Coin Offering, or ICO for short. The term is based on the Initial Public Offering, or IPO for short, i.e. the initial issue of shares on the stock exchange. The crucial difference between the two investments lies in the regulation: While strict guidelines apply to IPOs, ICOs are hardly monitored.
Billions are now being invested in ICOs and the trend is continuing upwards. CoinDesk reports that $6.3 billion US dollars flowed into ICOs worldwide in the first quarter of 2018 alone. That is 118 percent of the total year 2017.
Crowdfunding Involves Risks
In principle, the community-based financing of coins makes sense. Anyone can participate in crowdfunding, even with a small budget. The future users as financiers – you can’t get any closer than that. But the hope that the new cryptocurrency could have a Bitcoin career and multiply its value also leads to risky decisions.
Euphoric investors can lose huge amounts of money, both through an abrupt loss in value of the coins and through ICOs specially designed for fraud, which never intended to launch a real cryptocurrency. And thanks to a lack of monitoring, scammers have a comparatively easy time disappearing with the money collected in ICO fraud, while the duped investors are left sitting on their losses.
SEC Launches Fake Coin
Regulatory and supervisory authorities regularly point out the dangers of ICOs. Ethereum co-founder Charles Hoskinson warned of the ICO hype as early as summer 2017. Investors were blinded by the quick money without being sufficiently informed about the risks.
The US Securities and Exchange Commission (SEC) has acted and invented its own cryptocurrency in May 2018: The HoweyCoin, supposedly made for the travel industry. In truth, it is intended to teach potential investors how easily they can fall for blockchain scams and ICO fraud.
A modern website, pictures of a young and dynamic team and the alleged prominent support, an eight-page white paper and large discounts for quick investments are intended to attract unwary users. When the user clicks on the button “Buy Coins Now!”, they land on a website of the SEC, where the scam is then exposed:
We created the bogus Howeycoins.com site as an educational tool to alert investors to possible fraud involving digital assets like crypto-currencies and coin offerings.
Characteristics of an ICO Scam
On the landing page, the SEC lists typical signs of scams, with direct reference to the HoweyCoin page. A very clear warning sign is extremely large and supposedly guaranteed profits, because high returns are always associated with high risks and can therefore never be guaranteed.
The alleged prominent support is supposed to create trust, but should rather make users sit up and take notice. In the case of HoweyCoins, the SEC even went so far as to create fake accounts of the “celebrities” on Twitter. Making investments with one click by credit card is also dubious and smells like rip-off.
These signs, bundled together, are clear, albeit nicely packaged, warnings of an ICO scam, in which every potential investor should immediately become suspicious. Stricter regulation could remedy the ICO problem and steer the current hype in the right direction. The prospect of quick money, earned so easily, is too tempting for crypto novices who cannot yet realistically assess the consequences of their investments.
Further Important Information and Tips about Cryptocurrencies:
Understanding cryptocurrencies – how coins work
The Bitcoin capital – The Crypto-Valley Zug
Taxation of cryptocurrencies and profits in Switzerland
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