In this shift in bulls and bears, we should explore the reasons behind these negative reports: greed, fraud, and organized market manipulation. Many participants who do not have any financial background have created an investment culture of “player self-financing”. New technologies have spurred investor imagination and accelerated the cycle of greed and fear.
In many ways, the 2017-2018 cryptocurrency market is very similar to the Internet bubble of the 1990s. In addition to the potential to subvert many industries, the price of major assets has risen rapidly, and the prices of many secondary assets have also risen tremendously. In fact, most of the behavior in the ICO market is very similar to the over-the-counter trading in the stock market, as the film "Wolf in Wall Street" deducts. (Regulators attach great importance to this similarity. In the 1990s, there were thousands of securities that could not protect the interests of investors, so the same phenomenon can occur in the ICO boom. Fraud is a crime and should be punished. But there is no reason to kill an emerging industry when doing so.)
In today's article, I want to highlight four important lessons learned from last year:
The public has huge investment needs for early technology.
For investors, be wary of making quick money.
The hot money effect attracts opportunists and also triggers regulation.
The basic principles of financial markets should not be ignored.
Let's discuss each summary in turn.
The public has a large investment demand for early technology
As Clayton, chairman of the US Securities and Exchange Commission, said, capital markets have major problems in attracting new public companies. Since 1997, the number of listed companies has halved, and the amount of capital invested by venture capital and private equity funds in private companies has increased significantly. In the stock market, it is difficult for individual investors to have the opportunity to participate in early investment. Therefore, many ordinary investors have poured into the blockchain market. Even without a real business plan or operational product, a blockchain project can raise billions of dollars.
This phenomenon is a double-edged sword. On the one hand, the digital asset market is highly efficient and can better connect investors and entrepreneurs around the world. On the other hand, if the government adopts radical regulatory measures, it may cause the country to lag behind other countries in this emerging field. In this regard, regulators must cooperate with relevant companies to commit to more transparent information disclosure and protect the rights and interests of investors.
Investors should be vigilant about hot money
As the old saying goes, if something is too good to be true, it may not be true. ICO's enthusiasm has attracted both long-term investors and short-term speculators. Compared with traditional venture capital (VC), there are two main differences in ICO investment. First, individual ICO investors are unable to conduct due diligence and there is no way to get investor protection like VC. (That's why startups choose to use ICO for financing). Second, ICO provides more timely liquidity. After many projects are financed, they will be listed on the “Exchange” and investors can trade. This is an important reason why ICO projects attract investors.
The inspiration from the ICO boom is that regardless of whether it is a "securities," early investments (that is, no actual products and profits) should be treated equally. Such projects should disclose all important information related to the sale of these assets and strictly enforce anti-fraud rules.
When a lot of money is involved, fraud will follow
I have listed this separately because I want to remind everyone not to reject new technologies because of fraud. Any transformative technology, such as the Internet, genetic biotechnology, blockchain, etc., will be used by criminals. This situation is inevitable.
When fraud is rampant, the regulator will take appropriate action
When investors are defrauded, regulators will take steps to combat fraud. Sometimes the regulatory rules are reasonable and sometimes unreasonable. Practitioners should work more with regulators than with opposition and complaints. And the industry itself has to self-regulate.
There are many important reasons for the development of financial markets. The encryption market should actively embrace the financial market. Many negative reports are due to the fact that early currency holders and technicians know little about how financial markets operate, and many core beliefs conflict with principles such as investor protection and price discovery.
After years of evolution, the modern financial market has formulated a series of rules to ensure market fairness and protect the interests of investors. The cryptocurrency sector has selectively ignored these financial rules. Some virtual currency exchanges indulge price manipulation, and even internal employees are involved in price manipulation events. The US Securities and Exchange Commission (SEC) has made it clear that correcting this situation and establishing a culture of compliance is a necessary prerequisite for their approval of the Bitcoin ETF.
Price discovery / best execution
There is a premise in modern financial markets: all participants are clarifying the prices of assets, and these prices are determined in a transparent and open manner. Therefore, price discovery is the main goal of the market, and the concept of optimal execution (ie, the customer has realistic expectations of the best price at the time of the transaction) is the key to investors' confidence in the market. However, the prices shown on mainstream virtual currency exchanges ignore the prices of other platforms. At the same time, the price on popular encrypted websites is the average price of multiple sources of information and is not authoritative.
All in all, the excessive behavior of the cryptocurrency market over the past two years should be valued by the industry itself and by regulators. Encryption practitioners should understand how financial markets operate and combine them to protect investors. Given that digital assets are likely to improve existing banking systems and connect entrepreneurs to global capital markets, regulation is a necessary step forward for the industry. (OK Blockchain Business School)