Dear Crypto “Investors” — Wise Up or Get Out of the Way
Right now, you may have a lot of money in cryptocurrency. You may have relied on things you heard in social media, the news, or paid cryptocurrency advice publications. You may be at a +95% loss on your original buy-in.
I know your pain. I made some larger-than-usual cryptocurrency purchases in January 2018, myself, believing that cryptocurrency was going to continue increasing in value and that I’d make a profit. When the market took a downturn, I assumed it was temporary and that the masses would soon come to realize the potential of this groundbreaking, world-changing technology.
That hasn’t happened yet. The technology is still too new, complicated, and risky for most consumers and enterprises to use (let alone buy into). Necessary software infrastructure is still unbuilt, untested, or untrusted. Mass adoption is still years away.
But here we are, in the deep depths of a nearly year-long bear market, holding a small fraction of the value of our original cryptocurrency purchases, and desperate for a positive return on our investment or simply an acceptable exit point.
Stocks, bonds, and other security instruments have been around for a long time and, through legislation and legal precedent, entitle the owner to specific rights related to company equity, profits, and management.
Cryptocurrency, on the other hand, is still a mostly-uncharted territory. In the U.S., the SEC has recently taken enforcement action against ICOs and exchanges, but is far from finished with its regulatory crusade and has provided scanty compliance guidance. The courts have yet to weigh in on whether regulators have exceeded their legislative mandate. And Congress has been at a standstill for months to enact legislation that establishes bright-line rules to clear up legal and regulatory grey areas for cryptocurrency projects.
For the most part, you have no rights as a cryptocurrency purchaser until the regulators, courts, or legislature say so. Often, ICO purchasers will have signed off that their ownership of a cryptocurrency entitles them to no rights beyond a limited license to use blockchain software that is still in development at the time of sale. Secondary market (exchange) purchasers are given no disclosures at all. “DYOR” is the common refrain, but too few purchasers read a project’s white paper, and even fewer take the time to fully grasp a project’s value proposition and tokenomics.
Yet, in reaction to poor market conditions, many people are demanding that cryptocurrency projects find ways to “pump” the price and otherwise influence markets to curry more favor with retail purchasers.
Actions to influence price are regulatory suicide
Any action taken by a cryptocurrency project to influence the price weighs in favor of the regulators deeming the cryptocurrency a security — which renders it dead in the water.
In the U.S., the Howey test (named after a U.S. Supreme Court case in 1946 interpreting a statute from 1933) is still used to determine whether an investment offering is a security or not. If it’s a security, the issuer is required to go through an expensive, time-consuming process to register with the SEC and publish certain disclosures to the public.
The main question is whether investors were led to expect profits primarily from the efforts of the enterprise. In a market primarily driven by retail investors speculating on the future promise and value of nascent technology, it’s hard for any cryptocurrency project to argue to the contrary, yet few have taken steps toward regulatory compliance.
The SEC’s recent enforcement actions reveal its strategy going forward: non-compliant projects will be disgorged, fined, and required to submit to registration requirements plus additional reporting. For many projects whose cryptocurrency has fallen below ICO price, this would be a death sentence.
Your own worst enemy
Ironically, purchasers unhappy with their return on investment have turned against the projects they once supported in frustration. They demand an explanation for the poor price performance or a plan of action to reverse the downtrend.
As explained above, in the face of regulatory uncertainty, cryptocurrency projects find themselves in a catch-22: they risk either regulatory crackdown by taking action to influence the price on the one hand, or rebuke by purchasers on the other.
While a project weighs its options, or after it elects to avoid regulatory non-compliance, disgruntled purchasers continue their campaign for answers and action. Prospective purchasers, in turn, avoid these “controversial” projects, thus depriving earlier purchasers of the very capital they are clamoring for. The negative feedback loop continues, and a once-promising project eventually finds itself under-capitalized.
Constructive Criticism
Cryptocurrency purchasers need to learn patience, savvy, and tact if they hope to succeed in this market. Instant gratification must give way to multi-year development roadmaps. Get-rich-quick schemes must be passed over for projects with a long-term value proposition. Knee-jerk reactions must be tempered with deliberative forethought.
Now more than ever, cryptocurrency purchasers need to support projects with strong fundamentals: competent, capable leadership; a track record of meeting roadmap milestones; unique technical goals and achievements; a broad potential user base; and a relatable vision of the future.
By “support,” I mean more than lip service and cryptocurrency purchases: beta testing and bounty hunting; troubleshooting for new community members; meaningfully engaging in social media; learning about a project’s tech and tokenomics; being a project ambassador; and contacting their legislative representatives to endorse cryptocurrency regulations that foster innovation.
Passive, fair-weather investors need not apply.
None of the above is offered as legal or financial advice. While the author is an attorney, he is not your attorney, and you should always consult with someone one-on-one regarding the particulars of your situation before making any significant legal or financial decisions.
This article contains forward-looking statements that address future events and conditions which have not yet occurred, inherently involve known and unknown risks and uncertainties, and are subject to factors outside of the author’s control. Actual events and conditions may differ materially from those expressed herein. Past performance does not imply or guarantee future results. Do not rely on any statement herein as a guarantee that any future events or conditions will exist or the performance of any investment will be impacted thereby in any way.
The author holds Aion and Ether.
