The Initial Coin Offering (ICO) has created quite the buzz. We are seeing companies raise spectacular amounts of capital in days or even hours, some without more than a White Paper to back their case. This environment, however, is changing. Investors are becoming more wary and increasingly tend to dismiss ICOs that are not supported by strong teams and robust strategies as superbly outlined by Brendan Bernstein, TetrasCapital Founding Partner, in his article ‘Structuring Optimal Token Sales Amidst 2017’s ICO Mania‘.
That token strategies can be unsustainable, volatile and illiquid is a thing of the past – that does not fly anymore. While raising capital through an ICO is quite efficient, investors face multiple risks, some that are directly related to the business, other that have nothing to do with it. To break that down:
- An investment of $300,000 is made to get a future ICO off the ground in six months. The objective is to promote an ICO to sell a million tokens for $10 a pop in a month. If successful, the company will – if it aims to sell all available tokens during that period – have $10 million in its coffers. Not a bad return if the investor has a 10% share and even 5% of the tokens (worth $500,000).
- Capital is only tied up for six months and the immediate return is 67% or 134% p.a. Plus equity. How can this not be a good investment?
July 5 2017, Primalbase raised $7.5 million through the Waves platform in 24 hours. The concept was to invest in office workspaces worldwide. There are even more extreme examples like Bancor which raised $150 million USD in 3 hours. Why would investors not be all over this space? Actually, they are but their advisors are – or should be – looking into the sustainability, volatility and liquidity of the token strategies.
The problem is the disconnect from the financial system, including markets and the trading tools available there that have been developing for centuries if not millennia.
In order for an ICO to take place, it has to be pegged to a cryptocurrency. Buyers must acquire the crypto in order to invest. Typically, ICO tokens continue to be pegged against the root crypto which increases investor risk for four reasons:
- The business may fail to deliver which collapses token value.
- The blockchain protocol used can be faulty and subject to hacking or other means of siphoning funds elsewhere.
- The root crypto can be hacked or simply taken offline, giving token-holders no way to convert the value into actual (fiat) currencies.
- The crypto exchange can simply go offline, leaving everyone in the cold.
These reasons are why we have remained on the sideline of the ICO environment; it just didn’t seem sufficiently stable. While the gains are considerable, the risks are equally as significant. Still, the ICO is here to stay and it is rapidly replacing traditional financing as Stan Schroeder demonstrated in the Mashable article ‘$797 million in 3 months: Blockchain’s newest industry is going crazy‘:
ICO token strategies must be anchored and soon or the ICO will experience the DOT.com collapse. We are seeing the same signs right now. After that collapse, however, we got Google, Facebook, Twitter, LinkedIn, Amazon and Netflix that today are digital leaders and part of our lives. The same will happen with future ICOs. What we are experiencing now is the birth of an entirely new business structure and one that will eventually force governments to alter their legislative and regulative environments.
The first government that makes the move toward stabilizing this environment and supporting what is emerging as a new economic environment is likely to be the dominant and most influential player in the near future.