Of the 5,000 companies looking to raise money through selling tokens, some 1,500 of them are fraudulent.
The rapid rise in Bitcoin’s value in December 2017 gave credence to true believers who had been promoting the world-changing possibility of cryptocurrency. Then came Bitcoin’s sudden crash in 2018, which was proof to skeptics that it was just another mania, like Dutch tulips in the 17th century or Las Vegas housing developments in 2006.
Though Bitcoin and its cousin Ethereum, which has emerged for marketing the underlying blockchain technology, may be well known, they are not well understood. And that’s a problem for investors intrigued by the technology or just determined not to miss out on the next big win. The area has attracted so much interest that people holding themselves out as experts may be little more than enthusiasts. “Many of these advisers are kids who don’t have a day job,” says Daniel L. Gottfried, partner and chair of the international transactions practice at the law firm Day Pitney. “These kids are traveling all over the world. They’re showing up at conferences, where they talk about crypto stuff that they market to their wealthy friends to invest in. In these circles, I have a lot of trouble figuring out who’s for real and who’s not.”
The pull of the next new thing is strong, though, and there has been a boom in so-called initial coin offerings (ICOs), attracting investors through online forums. In that space, not getting hoodwinked requires work.
New cryptocurrency or blockchain companies often put out a white paper in lieu of an investment prospectus. White papers are quicker to put together, but they aren’t done with the same rigor as a prospectus, which every sophisticated investor would demand for a more traditional early-stage investment.
He claims the risk is exacerbated by companies selling ratings from self-proclaimed experts. These experts may not know what they’re talking about or, worse, may be part of the company trying to sell the coins.