Business on The Pump: The Main Thing Is To Withdraw On Time. How Speculators Manipulate The Market of Weak Projects
Currently, the number of cryptocurrencies in the market amounts approximately to 1500; but only 10 of them are actually traded, monitored by analysts and by special resources. Maybe, 20 of them. What about the others?
Statis Group LLC company conducted an interesting study. Analysts have chosen startups that have collected at least $50 million on ICO, and it turned out that only 8% of projects reached the listing on stock exchanges, 5% - failed for objective reasons, 6% died because of the authors' desirelessness to develop them, and 81% is a common scam. For August 2018, losses from dishonest ICOs amounted to $68 million. In 2017, investors lost $225 million.
At the same time, crypto-enthusiasts repeat uninterruptedly that institutional investors are about to appear in the digital market. These promises have been heard for three years already, but there are still no institutionalists. Large financial players are in no hurry to invest in the US and European virtual assets (in Asian markets, the situation is different, we wrote about it, and we will not repeat it here).
Alexei PROKOFIEV, the managing partner of the investment funds AddVenture and ADDCAPITAL tells Bitnewstoday.com why there is such a number of weak projects in the market of the Old World and how this affects the institutionalization of the market. We decided to start the conversation with the main problem of the virtual market: goals and the structure of investments.
- Investments are growing as institutionalists believe that the market has hit the bottom. You have to understand that they just expect to guess the entry point. Now, there is he tendency observed that owners of rather large capital, from two to five million dollars or more, have begun to show interest in virtual assets. But really big players, whose capital starts from 20-30 million dollars, are still only examining and expecting, first of all, legal instruments, the effectiveness of which depends neither on the conjunction nor on the arbitrary behavior of regulators. For the same reason, large institutionalists, who do not allow a budget risk above 2-5%, keep aside.
Most independent analysts believe that the main problem of the digital market is the absence of any unified form of complete and verifiable reporting and accounting documents, In addition, the absence of a unified supervisory authority with clear control procedures and independent audit prevents the investments.
- You say that investors have an eye out for the digital market and, perhaps, they are ready to take risks. How much do you think they are interested in the initial asset allocation? The statistics shows that the investments are growing.
- Here, the situation is double-natured. Firstly, an increasing number of professionals is beginning to understand that investments in ICO are winning only if you are able to maneuver yourself out of them. Secondly, they can be cost-efficient when the investments are on the assembly line and, at the same time, there is an access to good projects. If not, playing ICO is very risky.
In the global market, there are very few good projects. And, at the same time, the possibility of earning on them is, probably, much higher than on all the others taken together. Behind such startups, there is a line of investors. If you are not one of the first in this line of desirous, then you will either not wait your turn or they will not even take money from you. Good projects are not keen to take as much as possible from one investor. On the contrary, they want to take a little and from a lot of investors who will not be able to agree with each other and to pump all the money out at the start.
Even a strong project is not protected from failure. Suffice it to recall one of the startups of Vitalik Buterin - "DAO", which managed to raise $165 million. Due to an error in the source code, he confessed that he did not have on conscience; he had just "honestly" taken advantage of the "undocumented opportunity to get additional coins."
- And how many strong projects are there in the market?
- Less than 10% of projects are good. One needs relations to participate in them. Those who do not have any relation get burned and are forced to participate in weak projects.
A weak project can be not only a scam. Very often, it turns out that quite honest, but inexperienced in terms of the organization of the business process, people fail into a promising idea because of simple mistakes. Such a failure is to meet the deadlines. For example, the Tezos project collected limits shifted to February 2018. Then again. The company was introduced in the exchange listing in June, and its assets collapsed by 74% at once. As a result, the startup managed to regain the trust of investors, but the results were lower than expected.
- How do you participate in weak projects? Is it possible to invest in them in general?
- It is possible if you have the necessary relations and are a "pump virtuoso". I will explain. A weak project is a project with a high risk that the team simply will not do anything. And here, the point is not in the value that ICO will give, but in its credibility for the not well-informed people, and in how long the pump will last. The work of the investor with such ICO is a filigree art because their only hope is to earn on the first pump.
That is, when ICO joins some exchanges publicly, there will inevitably be a take-off moment, and less-informed comrades will rush to buy tokens, in the hope that the growth will continue, and this is a new trend. And at this very moment, you need to have time to disown all the coins of the project. This very "to have time" involves the risk and filigree of those investors who do not have access to worthwhile projects.
Not to miss the moment of the pump is the only principle of successful investment in weak projects. But if you are not in the cloud of informing a narrow circle of people who know when the pump begins, when the pump stops, then you often rely on guessing the exit point, which is even riskier.
Wikipedia suggests that the "pump and dump" strategy emerged during the dotcom boom of 1999- 2001. However, examples of this exchange behavior had occurred before. For example, the seventeenth-century "Tulip bubble" schedule in the Netherlands expresses the image of the pump schedule with a sharp, 1.000-percent increase in the cost of bulbs and two sell-offs of assets. First smooth, and then sharp. Those who first started using the pump knew the history pretty well.
- By what means is the artificial value during the pump charged?
- First of all due to non-professional investors. They simply do not have criteria for calculating the real cost, but at the same time, there are many of them and they create information waves. They praise a project in which they invested themselves. This is the first time the value is charged. But at the same time, all the noise is due solely to the belief in the fairy tale: non-professional investors have believed in it, and want as many people as possible to believe in the same fairy tale. Then the most intelligent of them understand that it does not matter to us whether the fairy tale will happen or not, let's take the money out during the first pump. They take them out. And this is how the second charge occurs.
- This is actually called speculation ...
- That's right. In other words, let's give those risks that are in the project, to the next investors. If those people who have collected money, do something, then there is a chance that their token will rise again. But there is also a danger that the project will announce, for example, the theft of collected funds. And go figure whether they have stolen, or they have been robbed. This happens.
Therefore, I cannot say that investing in ICO is a bad business, there are simply a lot of subtle nuances that must be deeply understood.
Serious investors have rigid and strict criteria for teams, products, and market strategies. Real players are not ready to rely on imagination, but they admit the kind of business called "speculation on the pump", and someone even knows how to earn money on it.
Today, the virtual assets market is estimated at $250-$300 billion. At the same time, the losses on it do not exceed one-tenth of the cost, although four-fifths of projects on the market are scams and pumps. Knowing this, it is easy to assess the real profitability of the very 8% of the strong projects that we talked about at the very beginning.
In conclusion, comparing venture investment to ICO, it should be noted that the first assures protection for an investor and manage the efficiency of capital expenditure but has low liquidity (an investor "sits" for 3-7 years in investment/ it takes 3-7 years for investment to pay off) while ICO provides liquidity but is not secure and does not monitor the efficiency of funds spending. Investment in the cryptomarket still bears high risks.
During the conversation, we found out that not everyone who called himself an institutionalist was really one of them. In the nearest future, you should expect the second part of the interview, devoted to how the real should be organized, and what actually the crypto funds at the present time are.
In the second part of the interview we are talking about the activity of the funds managing digital assets.