Tag: bitcoin

I’m Shocked That an ICO Promoted by Floyd Mayweather and DJ Khaled Was Fraudulent

“Gizmodo – SEC Charges Founders of Cryptocurrency ICO Promoted by Floyd Mayweather Jr. and DJ Khaled with Fraud“

I’m not even going to comment on Floyd Mayweather or DJ Khaled here, because if you invested a single dollar based on what a guy who can’t read posted on his Instagram, you should get burned. However, whatever you think about cryptocurrencies and their *sigh*, relevance, there is one indisputable fact: they have contributed to the meteoric rise of the ICO.

For anyone unfamiliar, an ICO (Initial Coin Offering) is a new way to raise start-up capital in the crypto space. At a high level, a start-up has an idea for a new payment system and agrees to issue their new currency supporting it to investors in exchange for bitcoin and/or ethereum. They then turn around and use the funds raised to develop the payment system and currency infrastructure. Say for instance, Domino’s wants to develop a system to revolutionize the way we all pay for pizza. You fund their venture with bitcoin and they give you PizzaCoin. If the payment system takes off and the value of PizzaCoin increases, good on you and your investment prowess.

The problem with the process is that it totally skirts the SEC regulatory framework for issuing securities and raising capital – ipso facto: it’s the wild west out here in ICO land. Any start-up in the world can issue its fake currency to any sucker that’s willing to fork over their fake bitcoin purchased with actual dollars. They can market the currency however, and to whomever, they please. This has resulted in numerous fraudulent companies raising millions of dollars from retail investors for their useless currencies. When I say useless, I mean totally useless – kinda like this ICO, the aptly named Useless Ethereum Token which has raised over $125K. What a world.

The worst part is that many unsophisticated investors don’t understand they’re not purchasing an equity interest in the company itself, but merely gambling on the value of the stupid currency they bought. Were one of these currencies to be widely adopted, the company itself would be clipping transaction fees left and right, but the ICO participant experiences none of the upside provided by the increased cash flows. You have investors providing equity capital to build the company and its product, but receiving a 0% equity stake in said company or product. It’s a perversion of the venture capital model, used solely to benefit the founders (equity holders) at the expense of investors bearing literally all of the execution risk.

These companies are extracting real dollars from the economy in order to build equity value for themselves, and leaving investors holding useless assets they created out of thin air. The sad part is that it doesn’t seem investors are catching on to the scheme, because every time one ICO blows up, I wake up the next day and it’s just like:

 

 

Overstock.com Realizes That Preparing for a Bitcoin Future Can Be Expensive in the Capital Markets Present

“CNBC – E-commerce company-turned-blockchain play Overstock.com‘s 4 million share offering has been canceled, according to a source familiar with the situation. Underwriter Guggenheim Securities decided late Wednesday night not to proceed due to market conditions, the source said.”

Overstock.com decided to kill it’s 4M share offering late Wednesday evening, as it discovered that while great for business in 2017, trading in lockstep with bitcoin hasn’t quite worked out in 2018. Look, I can see where Overstock is coming from. There is something to be said about first mover advantages and all that, but there’s also that John Henry line from the movie Moneyball: “…the first guy through the wall — he always gets bloody. Always.”

I subscribe to that philosophy. Let someone else innovate and deal with the cash burn. Outsource your R&D to the idealist and improve upon their design (or if they blow up, snatch the remains and run with it). In Overstock’s case, their CEO, Patrick Byrne, is the idealist. He had grandiose visions of transforming his e-commerce platform into a cryptocurrency exchange overnight, so the markets treated it like one. The guy has turned his once stable, discount furniture company into a crypto proxy with the likes of Riot Blockchain and that iced tea company from Long Island. Make no mistake: other large e-commerce and social network platforms would love to develop their own dominant medium of exchange a la crypto, and they’re taking notes on how to avoid the same fate as Overstock in the process.

Always remember: issuing equity can get expensive, especially when you’re planning on generating future cash flows by making markets in pixie dust. My condolences to Overstock shareholders.