The Deteriorating Fate of Crypto Currency Startups: Investor Losses and Coin Value Post-Bankruptcy
Investing in the volatile world of cryptocurrency is no easy feat. Startups in this space often face numerous challenges, and their failures can result in significant financial losses for investors. This article delves into the consequences of a crypto currency startup failing, the potential loss of investments, and how coin values may revert or behave post-bankruptcy.
Investment Risks and Failures in Crypto Startups
Investors in any asset class are subject to the risk of losing a significant portion of their funds. In the case of a struggling crypto startup, both development firms and new coin offerings (ICOs) face unique challenges. Let’s explore the differences between these two types of investments.
Development Firms: When a development firm seeks funding from investors, the money is not merely held in an account. It is allocated for various purposes, such as purchasing stocks, paying employees, and other operational costs aimed at facilitating the startup’s profitability. This investment is critical for the company to turn a profit or achieve financial sustainability.
New Coin Offerings (ICOs): ICOs, on the other hand, present a higher risk for investors. The value of new coins is derived primarily from the interest of potential buyers. Most crypto coins are programmed to have an inflationary value, making them high-risk and potentially highly volatile investments. In some cases, the coin’s value is in a zero-sum game, where the main objective is to liquidate as fast as possible. This high-risk nature is part of what draws many investors, but it also makes it crucial to conduct thorough due diligence.
What Happens When a Crypto Startup Fails?
If a crypto startup fails, the company may enter a voluntary or creditors’ liquidation process. This process involves selling off the company’s assets, paying the liquidators’ fees, and then allocating the remaining proceeds. Let’s break down the steps and how they affect investor funding.
Liquidation Process: In the event of liquidation, the company’s assets are sold. The net proceeds from these sales are then used to pay creditors first. If there is any surplus after the creditors have been fully compensated, it may be distributed to the shareholders. However, this is a best-case scenario. Most failed startups do not have numerous assets to sell, and creditors often only receive a portion of their outstanding debt, with nothing left for shareholders.
Investment Structures: To protect themselves, some investors opt for a different investment structure such as Convertible Loan Notes or Preference shares. These structures are designed to ensure that investors get their money back before the common shareholders. However, even with these protections, the chances of recovering full investment are slim when a startup fails.
Understanding Coin Value Post-Bankruptcy
When a crypto currency startup fails, the value of the associated coin may behave differently depending on the type of ICO. Here are some scenarios and examples:
Inflationary Coins: Many coins are programmed to be inflationary. This means their supply increases over time, potentially devaluing the coin. However, some coins may transition to a deflationary model. For example, Dogecoin, which was once highly inflationary, is now gradually becoming deflationary. This shift can stabilize the coin’s value and even lead to potential profits for long-term holders through dollar-cost averaging.
Zero-Sum Game Coins: Some cryptocurrency startups are involved in a zero-sum game, where the goal is to empty the coin’s treasury through rapid liquidation. In these cases, the coin’s value may plummet, and investors are likely to lose their entire investment. Dogecoin, despite its current low value, is a good example of a coin where early investors can still find profitability through consistent dollar-cost averaging.
Case Study: Dogecoin
Dogecoin provides a compelling case study for understanding the long-term potential of a cryptocurrency. When it was first introduced, Dogecoin had a rapid incline in value. However, it is facing challenges in the current market. Despite this, the coin has shown that it can transition from an inflationary to a deflationary model. This demonstrates that even seemingly worthless projects can become valuable through strategic long-term investment strategies such as dollar-cost averaging.
Conclusion
Investing in a crypto currency startup is a high-risk endeavor. The failure of a startup can result in significant financial losses for investors. However, the coin’s value after the startup fails can vary significantly depending on its programming and market behavior. Understanding these dynamics and conducting thorough research can help investors make more informed decisions.
It is crucial for investors to ask themselves if the product is compelling enough to sustain long-term value, especially as the market becomes more saturated. Research, diversification, and a long-term investment strategy can help mitigate some of the risks associated with investing in the cryptocurrency space.