ICOs: Confusing Concepts, Missing Products, Open Wallets

Bitcoin, once the medium of financial exchange for the Internet’s shady backwaters, traded over the $4,000 mark last Saturday. Its price is still on the rise.

Bitcoin’s improbable bull run reflects how the overall crypto market is doing in recent months. Believe it or not, the total market cap of cryptocurrencies has already exceeded the value of several top unicorns (Airbnb, SpaceX, and WeWork) put together.

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Since its creation in 2009, cryptocurrency has shifted from a currency being used to buy drugs on the Internet to a volatile financial asset ideal for speculation and day trading. Now its underlying technology, the blockchain, could potentially decentralize economic power and challenge authorities.

While more people are trading cryptos, more startups are using initial coin offering (ICO) as fundraising alternatives. According to Coinschedule, 2017 alone has witnessed at least 90 ICOs, which raised a total of approximately $1.3 billion (12 times the amount in 2016). Investors and the media are fueling the crypto frenzy, but not much substance stands to explain the bubble-like phenomenon. We decided to take a look at what leaders of the crypto pack are really up to.

The Top Five ICOs

Using Crunchbase data, we compiled the top five ICOs in 2017 globally:

Filecoin has raised the largest ICO to date — close to $200 million, in addition to the $52 million raised during pre-sale.  As part of blockchain startup Protocol Labs, Filecoin aims to build a decentralized storage network (DSN). In this case, miners (think of them as contributors to the blockchain network) earn rewards by providing storage space. Though Filecoin’s network has encountered many technology issues and could take another year to launch, investors are clearly betting on it to become the future of data storage.

Before the dawn of Filecoin, Tezos was once the most lucrative ICO, raising $232 million. The startup claims that its blockchain community resembles a commonwealth, where participants can vote on and upgrade protocols.

Bancor Protocol issued its own token BNT, which secures liquidity for issuers and holders of new cryptos. Essentially, BNT is a common currency that allows you to trade any newly issued token at any time. Despite that Bancor raised $152.3 million in its ICO, the token community voiced concerns of Bancor being a scam, which may have explained BNT’s post-ICO price drop.

Status.im and TenX, though ranked relatively low on the table, probably have more tangible technologies. Status lets you send payments and smart contracts to friends within its chat platform, and TenX enables you to buy coffee or groceries using Bitcoin, ether, or whatever blockchain assets you have in your wallet.

Why Traditional VCs Invest In ICOs

We get that crypto fanatics and blockchain-focused VC funds invest in ICOs, but it’s pretty uncommon for traditional VCs to get involved. Most notably, investors, including Sequoia Capital, Andreessen Horowitz, and Union Square Ventures, participated in Filecoin’s $52 million pre-sale earlier this month.

Though we asked the firms to answer how long they intend to hold the tokens and if they will continue to invest in this fashion, none were willing to do so on the record. But we do have a few speculations on why VCs would lay their hands on such a volatile and unregulated market as crypto:

First, ICOs appear to be quick money. On average, it takes about 8 to 10 years for a VC to exit and receive returns, whereas the price of cryptos can fluctuate within a matter of hours or days. Just in the last month, Bitcoin’s value doubled, and Ethereum’s market cap soared by $14 billion.

Cryptos also provide much more liquidity than traditional VC deals do. Rather than tying a large sum of money to one startup, investors can technically sell their cryptos at anytime.

Second, venture capital is founded upon investing in nascent and risky ideas, and expecting them to one day become breakthrough technologies and generate attractive returns. Crypto and blockchain could potentially revolutionize many industries at a global scale, from streamlining banking to reinventing the way we secure valuable data.

The Future of Cryptos Stand On Shaky Grounds

Cryptos still reside in the mysterious and unregulated wilderness. You may have heard of the Bitcoin-powered shady drug-dealing, or the ICO hack that stole $7 million.

Aside from scams and frauds, increase in regulatory control presents another risk. The SEC recently announced that failure to register ICOs could be punishable under criminal law. The blockchain ecosystem would collapse if regulatory bodies were to tighten up its grip.

For now, all investors can do is to pray that regulators stay out of the crypto market, and that their new coin’s value doesn’t go into free fall.

Glossary

According to Investopedia, cryptocurrency is “a digital or virtual currency that uses cryptography for security.” We won’t get into the math behind it, but essentially transactions can happen between two parties without middleman institutions like banks. Digital signatures and keys unique to each transaction ensure the security of money transfers.

Blockchain, like an online ledger, keeps tracks of transactions, which are organized into blocks. Each block builds on the previous one in a chain-like fashion. For hackers to take over the system, they would need double the computing power of the network and convince 51% of the community to use their version of the chain.

Cryptocurrencies operate using hard-coded protocols, which determine how the blockchain is constructed, how transactions are carried out and other factors. The application of blockchain goes beyond Bitcoins and money transfers. Ethereum, for example, is built on a more generalized framework that enables wider applications such as smart contracts.

An ICO, or initial coin offering, is kind of similar to an IPO, except that startups raise money from the public and evade SEC’s rigorous oversight. Investors, who participate in an ICO with existing tokens such as Bitcoin or ether, hope that the new coin they are promised with will surge in value. ICOs are also known as crowdsales (instead of crowdfunding) since investors get something in return.

Top Image Credit: iStock / munandme