Hedge Funds are finding it much easier to flip ICOs than it is to actually try and trade/invest in Bitcoin or other virtual currencies.
As you may have heard Hedge Funds are starting to enter the crypto space in larger numbers.
Per a report out the other day by financial research firm Autonomous Next, there are approximately 75 hedge funds currently in the space:
https://steemit.com/cryptocurrency/@jrcornel/goldman-sachs-getting-involved-with-cryptocurrency-trading
As we are hearing more and more though, many of them are not exactly investing in the space...
The Game:
The game is simple.
These hedge funds, through their name and their wealth, are able to score deep discounts on upcoming ICOs via pre-sales.
The pre-sales are basically sales of the currency at a discount to whatever the ICO price intends to be.
Currently the going rate seems to be somewhere around a 30% discount, but there are reports of even steeper discounts on several projects.
Then, in most cases, the tokens purchased at a discount also have no holding period for at least half of the investment.
(Substitute "player" with "hedge fund" and you get the idea)
Why is this a problem?
It is a problem for a couple reasons.
The biggest one is that hedge funds have no stake in seeing their investment and the project through to completion.
They get their discounted tokens, with no holding period requirement for a large portion of their investment, and then they dump the tokens immediately once the coins begin trading.
They collect their 30% profit (at the very least), and then move on to the next ICO project.
Rinse and repeat.
This is exacerbated by the fact that the size of the hedge fund investment, in most cases, represents the majority of the cash raised by the ICO project.
Which means them selling has an overwhelmingly negative affect on the price.
In comes regulation.
This entire setup is exactly why the ICO process is being so heavily scrutinized currently and is about to be heavily regulated going forward.
Mom and pop investors are holding the bag while hedge funds dump their discounted pre-sale coins on the unsuspecting masses.
And this doesn't even take into account some ICOs that are outright scams themselves. This is just talking about the legitimate ones!
Keep in mind that this isn't happening in every instance, and hedge funds that become known as flippers often find it difficult to get in on the next ICO pre-sale, but nevertheless, it is happening for more often than I'd like to admit.
Especially when there are so many projects out there desperate to get some kind of funding. They often take deals they know are not great because they don't have many other options...
My take away from all of this:
Regulations are coming for the ICO markets, and it's going to be great news for the rest of the market place. Coins that did things correctly and are on the up and up are going to receive more investment dollars that might have otherwise found it's way to pump and dump schemes.
I am not sure how all of this will affect Steem and its SMT project going forward as they seem to be separate things.
Perhaps steem and SMT can even pick up where the ICO market leaves off?
Ironically, the next leg up for the crypto space likely will be fueled by more regulations instead of less. Which is ironic in a currency that was created with hopes of being mostly regulation free, or at the very least, as a way to circumvent them.
Stay safe my friends.
Sources:
http://www.gulf-times.com/story/566026/Hedge-funds-flip-ICOs-leave-other-investors-holdin
Image Sources:
http://www.safetysign.com/products/2967/no-dumping-sign
https://www.cryptocoinsnews.com/pump-dump-know-signs-trading-altcoins/
https://www.cbinsights.com/research/blockchain-startup-deals-ico-trend/
