By Lihan Hyunwoo Lee, CTO / Co-Founder, Xangle
Lihan is a serial entrepreneur and technologist who solves real world problems with a data-oriented approach. He previously founded OpenSurvey, Korea’s first and largest mobile survey startup. He was also the co-founder of a leading F&B startup that deals with sensitive medical data. His current passion is towards using data analytics to help solve the transparency issue that plagues the crypto industry.
Could the crypto industry die because of too many bad experiences?
The opportunities crypto offers today seem to be endless. While cryptography itself has been used for thousands of years, cryptocurrency and other crypto offerings began in 2008 with the creation of Bitcoin and the articulation of the blockchain technology at its core. In the time since, Bitcoin has been joined by other cryptocurrencies, which are not only gaining everyday adoption, but they’ve attracted investors who see crypto as a worthy asset to pay attention to. Blockchain technology is providing new opportunities for transparency into supply chains and records, as well as providing decentralized ways to conduct business. And now, crypto start-ups are using Initial Coin Offerings, or ICOs, as a new way to raise early funding.
But all the excitement and innovation could end very easily if investor experiences don’t improve.
Imagine being a newcomer to the crypto space. Imagine finding a new crypto project that looks interesting and promising, so you take a chance and invest. Then imagine waking up one morning to find the crypto start-up disappeared overnight, taking your investment with them. You not only can’t recoup that loss, but you probably wouldn’t invest again, and would advise your friends not to either.
A bad experience leads to bad word of mouth, leads to loss of confidence, which can destroy an industry incredibly quickly.
ICO Investor Discontent and Confusion
Unfortunately this experience is more common than we want to think. We recently published a report entitled ICO US-Based Retail Investor Sentiment & Outlook 2020, where we surveyed 600 U.S. retail investors to find out their experience in investing in a crypto start-up. We found that there were a variety of experiences with investing in an ICO, and not all were positive.
There were a number of reasons why they invested — the top reason was to make money — and there were a number of places where they reported getting their information about the companies they invested in. Some had a positive experience and would invest all over again. And some had a negative experience, and would never invest again. The positive experiences didn’t outweigh the negative ones, however. They were split nearly 50/50.
When asked if the investors felt the ICO project intentionally deceived them or withheld information, 33% of investors said yes. These investors didn’t feel indifferent to the project, or neutral about their investment. They felt there was some kind of deception and dishonesty happening. And that’s a huge red flag if a full one-third of newcomers in an industry feel that way.
An additional 17% said they didn’t know if they were being deceived or if information was being withheld. In other words, they didn’t know enough about the project, the company, the expectations, or the industry to know if something was going wrong.
When the investors were asked if they would invest again, 56% replied that they would, but they would do more research first. And when asked what was holding the crypto industry back, the biggest response was “lack of awareness.”
So how can you fix bad experiences that could harm an industry? From the report, the answer seems to be education, awareness, and transparency with investors.
Bad Habits That Got Us Here
We could point to a few industry bad habits that got to this point, where investors felt that information was being withheld, and that more research would be needed to stay away from bad investments in the future.
The biggest reason is that the industry has no standard around disclosures, where crypto start-ups looking to go to market would release information around their projects. A standard practice in traditional investing, disclosures provide investors with everything they need to make informed investment decisions, including information around the founder team, their business model, their expected earnings timeline, and other data.
But crypto start-ups are under no obligation to disclose anything about their project, which probably accounts for the surveyed investors feeling like they had a lack of awareness, information, and insight into the project to help them make better judgments. What information start-ups do release can exist anywhere on the internet, causing investors to have to go out of their way to search. Since crypto asset investment is quite new, there just aren’t best practices built up around investor relations yet either.
Solving the Transparency Problem
If the biggest issue is a lack of transparency, the solution is more awareness and more information with easy access. It’s what the investors who felt deceived by their ICO experience wanted, and so in order to keep the industry growing and thriving in a positive light, the way forward needs to be a focus on transparency.
It’s a simple solution: Have a central hub where crypto start-ups can provide disclosures around their company, and where investors can go to learn. This would alleviate the information asymmetry issue that plagued the respondent to the survey. There, investors could learn more about the company and the team behind it, how their ICO issuance will work, their forecasts and their timeline, and can see whether the founders are committed, or whether they’ll turn out to be an overnight exit scam. Our report uncovered that investors were getting their information from a variety of sources — number one being word-of-mouth from friends and family — so a central disclosure hub would provide a reliable, vetted, standard source for them to turn to.
Disclosures can also help investors put a better valuation on the crypto asset or project they’re investing in. And better valuation serves to stabilize these types of investments, which is good for the entire industry overall.
Encouraging disclosures also means instilling in companies the benefits of transparency to their investors, and that the more communication, the better the investor relationship, which leads to more investment and partnership in the future.
Once companies start realizing the value of disclosing their information and being more transparent around their projects, the industry will begin to shift. It’ll create inherent checks and balances that will surface serious projects of worth who want to be transparent — and flag projects who don’t disclose as shady or scams.
Ultimately, the goal of crypto investing is not just healthy growth. It’s to never have responses like those we saw on the survey, where investors felt deceived by their experience. It will take establishing some new best practices, and getting transparency to become the status quo. But it’ll be worth the effort to have the answer to “Did you feel deceived?” be “Not at all” for every investor.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
