Why Disciplined Investment is not Commonplace in Crypto?
A veritable modern-day gold rush, the ICO fever has brought in swarms of new investors into the nascent cryptocurrency market. In just a couple of years the world has seen thousands of Initial Coin Offerings promising investors stratospheric returns like those experienced by early participants in Bitcoin, and being relatively affordable and accessible they have attracted new investors to two worlds where they have little experience: investing and crypto. Pseudo-pundits have sprung like wildflowers in the rain seeking to cash in on the crypto fever charging for so-called advice, while others seeking to make a quick buck have taken advantage of the lack of legal and regulatory framework to create fraudulent ICOs and escape with the proceeds. All the while, disciplined investors have been understandably watching from the sidelines, hesitant to participate in a market plagued with high volatility, misinformation, information overload, and nefarious actors. These three factors — amateur investors, untethered and unregulated ICO supply, and timid experienced investors — have created an environment where short term decisions reign and the information and transparency needed for a measured investment strategy are lacking.
The quick buck has been preferred to the long-term return on investment
Rush mentality and amateur investing have led to behavior that ignores perhaps an essential tenet of disciplined investment: having a long-term strategy. For those of us in the space, all too often we hear from a friend that is “participating in an ICO sure to be the next Bitcoin” or buying into the bottom 25 cryptocurrencies because “if one of them yields the returns of Bitcoin I’ve hit the jackpot” (these are, by the way, both true stories). Blinded by the possibility of rapid returns, people jump into the space hoping for a quick payback without thinking through how they are choosing their assets, what these assets represent, or whether they have a differentiated portfolio (for all they know these currencies are basically all the same).
All the while, the conditions are ripe for confusion and misinformation.
Even for those that wish to pursue a disciplined strategy, it may be challenging to find accurate information. There is no lack of “information” and deceitful ICOs (on the higher end of the estimates a recent study found that up to 80% of ICOs turned out to be scams) that can cause an overload and impede sound decision-making. Asset diversification may not be easy, as cryptocurrencies and tokens are a new kind of asset being offered through a new kind of vehicle (the ICO): some are securities, some are true utility tokens, others may simply be currencies for microeconomies, and many pretend to be one or more of the above.
Fortunately, the panorama is changing in favor of an environment more conducive to disciplined investment.
As true experts instead of false prophets gain recognition in the space, new and better information is becoming identifiable and accessible to investors. One of the few academic studies on ICOs diagnosed the market thusly:
the core issue [is] the lack of enforcement of existing legislation covering currency and equity tokens (which are effectively securities in most cases) which is due to the information asymmetry between ICO sponsors on the one side, and ICO participants and enforcement agencies on the other. A coordinated effort of regulators around the globe, aiming at information gathering and inquiries into the ICO business models, could help close the enforcement gap we identify, enhance investor protection and reduce the over-excitement that drives the current ICO market.
We see this happening without the help of regulators already. The entry of institutional and experienced investors is creating demand for better investment opportunities and will create pressure for the generation of solid assets with transparent information to design sound investment strategies. Together, minimizing “information asymmetry”, the demand for better information, and the entry of experienced investors is slowly bringing discipline to the present-day gold rush.
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