Crypto Currencies Dive After China's ICO Ban

While cryptocurrencies are a hot investment, learn how China is putting a dent in the industry

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Oct 22, 2017
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Crypto currencies like Bitcoin and Ethereum remain a touchy topic among traditional investors. While on the one hand they’re certainly speculative and highly volatile, annual returns of 3000% and higher continuously boggle the mind as the new coin on the block turns into the crypto market’s latest unicorn. But it’s not all moonshots and overnight successes. If you look at the world coin index today, you’ll see a whole lot of red.

If you’re looking for information about the latest cryptocurrenices on finance blogs, you’ll notice that much of the blame for Monday’s crash goes to China. But before we get into China’s part in this latest market turbulence, we’ll have to explain some of our terms.

It all starts with the ICO. As any investor knows, an IPO or Initial Public Offering is the first time a stock is made public. Sometimes there’s a feeding frenzy, and other times investors take no notice. The same thing occurs in the world of crypto tokens. Each new token is based on one value proposition or other. Perhaps the company behind the coin has created a way to offer cheaper cloud storage than other existing platforms. Perhaps they’ve created a network by which to distribute donations to scientific research. Whatever the case, the best or most exciting ideas will get the most attention when they present their ICO.

In recent history, various cryptos have raised hundreds of millions of dollars in just hours, as people from all around the world try to snap up piles of digital tokens for the hope that they’ll one day appreciate greatly. This has caused problems in a number of ways. For one, the sheer volume of ICOs have caused networks like Ethereum (the technology upon which an ICO might be built and executed) to become seriously constipated. In other cases, opportunistic techies created scam tokens with no inherent value, knowing that hype alone could make them millionaires.

China wants to avoid this. China’s answer to Ethereum, NEO, was prepared to start its own wave of ICOs. China initially announced that it would regulate these coin offerings. Then, with multiple ICOs preparing to launch, China banned them outright overnight, forcing companies that had already taken money to return it to investors, or be heavily fined.

On Sunday night, NEO’s price was cut in half. American investors woke up to realize that the steady gains they’d be seeing for months had been cut away. Many who had bought at $40 or $50 suddenly saw the value of their position composed of units worth less than $20. NEO has yet to speak to the ban, and it’s unclear if China intends for this to be a permanent measure. Whatever the future holds, though, it’s clear that cryptocurrencies remain a totally different animal than government regulated securities.

While traditional investing might still not offer the same meteoric rises as crypto, set-it-and-forget-it options like betterment investingsimply doing exist in the world of digital tokens. For investors (if they can truly be called investors), the risk is still incredibly great, as holders of Bitcoin and every other major currency learned this week.

It seems unlikely that China will ban ICOs forever, especially as nations like Russia embrace blockchain tech with abandon. For people in the tech world, blockchain technology is perhaps the most exciting innovation of the past several years, with opportunities for disruption in banking, media, and countless other industries. It would be hard for a nation as large as China to formally squelch every aspect of this, by definition, decentralized technology. But it’s perhaps for the benefit of Chinese crypto in the long term that the chaos of Western ICOs will not be allowed to repeat in the East.

Disclosure: I do not own any shares of any stocks mentioned in this article.

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