Tragedy of Lotteries

Government Lotteries vs ICOs

No rational person would advocate every financial product out there. Although no person has a right to misrepresent their offer for gain, what they all have is the right to promote their projects. 

Investors have the right to see the different projects and evaluate them, whether they are brilliantly prepared and presented by highly capable teams, or even incompetently developed by clueless hacks. 

Not crooks, just hacks.

But let’s see what governments promote as an alternative to ICOs, using the UK Government’s state-franchised National Lottery as an example.

Looking at the figures, for the year ending March, 2017, the National lottery sales were £6.9 billion. 43% of these “investments” (publicly promoted for their financial upside) were losses for the investors. Forget where that 43% goes, the people generally buy tickets for the upside return. Otherwise they would just volunteer to pay more taxes or pay charities directly.

43% of Government Lottery Investments are Losses

Lottery ticket buyers invest in long-shots because poor people have a greater marginal utility for higher-reward investments. Of course, higher-reward investments are necessarily higher-risk investments, for why would anyone offer a high reward if there was not a corresponding risk?

In this example, winning a lottery is one way a less-wealthy investor can actually change their social status. Governments take advantage of this reality with their lotteries, where they return very low percentages to these poorer investors, who put billions of their hard earned money into them, most getting nothing in return.

Fundamentally, government lotteries compete with ICOs. The government lotteries are ultimately “binary option” investments because you either win, or lose. Private sector binary options losses in the UK were ~£60m in 2017, less than 3% losses on at least ~£2 billion in trading volume. Losses for the UK’s National Lottery were just under £3 billion.

ICOs Produced Profits on Average for Investors

ICOs are not binary options, except maybe in the long term. ICO tokens can increase in value, and you can cash out, subject to trading volume, at any time, or “hodl” for the long term and take your chances. Tokens sold in ICOs can rise from the dead, like Amazon stock after the dot-com bust, and perhaps become amongst the most successful of investments.

In 2017, ICOs produced a gain across all investors of 1320%. That’s lower now, because of ~50% drop, so we can perhaps think of that gain as ~600%, as an off-the-cuff calculation.

Clearly, ICOs are annihilating lotteries when compared as high-risk investments. It is interesting to note that there was a significant drop in National lottery participation in 2017, while there was a very big increase in ICO participation. The correlation is not strict, and does not imply causality, but it suggests that it be considered, or even studied. 

Perhaps this is one reason for government calls to regulate ICOs.

Cryptocurrency advocates (and less wealthy investors) ought to start a movement to regulate government lotteries.

Why Worldfree's FreeMark is a Better ICO

Worldfree’s new FreeMark is entering this ICO competition for creating new monetary instruments. The FreeMark is designed primarily as a new medium of exchange, or a currency. That is the FreeMark’s utility

ICOs are special for two reasons. 

Firstly, they are initial sales of currencies. Various regulators want to judge the purpose of the funds exchanged during initial sales of new currencies as a justification for regulating them. 

But this is unfair. If you sell $100,000 in USD for its equivalent in Swiss Francs, CHF, does the government ask what the seller is going to do with the $100,000 he receives from you? No, he or she can do anything they want with it.

Worldfree is selling FreeMarks in exchange for various types of currencies, government fiat or crypto currencies. Worldfree explains to buyers of FreeMarks how the funds we receive will be spent to create the market and the network for using FreeMarks. 

We are literally doing more for the buyers than normal transactions between currencies. Partly because the FreeMark is new, and as of yet does not have a large community of users. And Worldfree has engineered a reward, called Growth Rate Royalties, that is engineered into the currency to compensate new users for the early risk, in proportion to that risk. 

ICOs Are More Valuable to Less-wealthy Investors than to VCs and Institutions

Secondly, ICOs are special because they allow less wealthy investors to participate in high reward opportunities. As mentioned, high reward investments necessarily are high risk investments. Risk and reward are proportionate, and intelligent businesses recognize that early adopters must be compensated for their risk. 

Again, it is important to understand that less-wealthy investors have a much greater marginal utility for high-reward investments than do venture capitalists or institutions. That is, a 10Xs-plus return means much more to a less-wealthy investor than it does to a wealthy investor in a VC (venture capital) fund. 

For example, if a person has a $50,000 income, and saves $10,000 of it, and invests that for a 10% ROI (Return on Investment), which is traditionally a pretty good ROI, he or she will earn or win $1,000. Well, that’s not much, and they are likely being paid more in their job for their time than in that relatively successful investment. 

In the present times, achieving a 10% return is not an easy task. The FreeMark Reserve Endowment, which provides the asset-backing for the FreeMark, aims for a 6-7% return, and that is using highly-experienced and capable investment managers, with a fund size that allows economies of scale. 

But if that same investor earns or wins 10Xs his investment of $10,000, or $100,000, that is enough, for instance, for a down-payment on a home (in many places). That can be life changing, and thus has a much greater importance to this less-wealthy investor than to a VC who may be a multimillionaire. 

By regulating less-wealthy investors out of high-reward investments, governments are thus stunting social mobility. 

ICOs Improve Economies

In addition, by regulating out 95% of the investment market of less-wealthy investors, biased government regulators are raising the cost of capital for entrepreneurs, and reducing the amount of it.

This gives VCs and institutions greater ownership of new firms, and reduces competition by lessening the amount of new firms that can attain funding. 

This stunts economic growth, raises prices to consumers ultimately, and reduces employment, as new businesses are the primary creators of new jobs in most of the world’s economies. 

So the next time you hear calls for more regulation of investment, consider that maybe it is the VCs and Institutions that are doing the screaming, trying to improve their own returns by limiting competition for investments by regulating-out smaller investors. 

They don’t care that it hurts economic growth, or that it stifles social mobility.