ICOs and Fraud cycle
Reading a paper by Tuur Demeester “FRAUD , FRAUD CYCLE , AND BUSINESS CYCLE” which analyses Business cycles from an Austrian point of view, I have met a good scheme.
Thanks for that scheme, I’ve understood all my worries about cryptocurrency market and blockchain hype in general.
The original monography it pretty hard to read. However, the presence of the fraud cycle scheme allows better formulation of my thoughts using Tuur’s (Austrian school) definitions. Firstly, we shouldn’t understand that the picture is only relevant to single ICO project. In my opinion, we should consider it for the whole market omitting some unimportant details.
Let us consider some cycle stages; the order is characterized by honest interpersonal communications despite the entrepreneurial errors could be observed and could potentially lead to damage. I find such period in cryptocurrency from 2009 to 2012, when Bitcoin was first introduced and its development process concentrated around the small community (probably they know each other and validated PGP keys, used WoT powered OTC) without much media attention.
On the next stage, we have fraud phase. We observe a lot of “imaginary goods” and overconsumption. In my opinion, this period continues now. Before there were numerous Bitcoin forks, now we have various ICO. Here, I would use cryptomarketcap statistics.
We could consider some products with proven properties or viable developer community, for example, Bitcoin, Litecoin, and Ethereum. Also, there are some controversial cryptocurrencies like DASH. The rest are the goods with unproved properties or just mimicking brands, for example, IOTA and BCash. We consider them as “imaginary goods”.
The fraud phase consists of several other phases T1, T2, T3. The feature of these phases is in the fact that the “real goods” lose market share because “imaginary goods” are always produced faster. The fraudsters could potentially lead to even scarcer “real goods” because they know very well what goods are better. However, the whole market grows fast, and simultaneously people possibly do not recognize “real goods,” or selling “real goods” being lured by high gains. The fraudsters always try to make better promises for their “imaginary goods,” because it is easy. On this stage, the costs are hidden or unknown. The potential of derivation more imaginary goods from imaginary goods is unlimited, especially when it is not bounded by energy consumption. Also, these imaginary goods convert to each other pretty easily.
On the third phase the crisis arises and then the restoration will start. We could think that we have observed such effect already if we look at market cap figure. In my opinion, we haven’t achieved it yet. The deep crisis will be accompanied by massive media company about the insolvency of the most ICO projects, bankruptcy, scandals and new ICO will be halted completely. In this stage, people start to recognize errors and evaluate costs. They will try to hoard instead of investing aggressively. Here, the market cap of the “proper goods” will start to recover. Probably, these “proper goods” didn’t change so much during the cycle (and it makes sense for truly decentralized cryptocurrencies). They could be even improved during this crazy ride.
It is hard to make any forecast now. The cryptomarket changes rapidly. In my opinion, anybody can’t make any profit from such forecast except that be very careful investing in any ICO project. The crisis will be very dangerous for the whole market. This includes fans of Turing completeness as soon as true hodlers. However, the true hodlers are in better situation by definition. Usually, long-term investments imply a careful analysis of fundamentals.
