Holla 4 a dolla in this ICO-cracy! Photo: The Wolf of Wall Street (2013)
Unless you’re a normal, well-adjusted person who isn’t addicted to blockchain, you probably feel as incredulous as I do in this age of endless Initial Coin Offerings (ICOs). As of July, there are over 900 cryptocurrencies available on the market, with new and chimerical creations trying to ooze their way into investors’ pockets everyday. Since January, roughly 300 new coins have been added to the market, which averages out to be around a whopping 50 completed ICOs a month!
Source: CryptoNews
ICOs are what the cool kids are up to today, and in many ways a natural progression from the bevy of crowdfunding venues such as KickStarter and IndieGoGo. You are probably familiar with Initial Public Offerings (IPOs), when a privately held company goes public by selling shares to investors. By doing so, the company can raise significant capital to fund future expansion while rewarding the founders and venture capitalists who dared to dream.
While the fundraising goals are largely the same, depending on the cryptocurrency group ICOs can differ tremendously from IPOs and even each other. While IPOs have to “prove themselves” to Angel or VC investors and endure a regulatory onslaught of cringeworthy proportions, there is no requirement for the groups behind ICOs to provide any kind of formal plan or contract to their investors. Instead of offering shares, ICOs distribute coins or tokens that may have some use related to their product but whose value is often not linked to equity in the company or any financial metrics.
In simpler terms, there is really not that big of a difference between many ICOs and a GoFundMe page detailing why you should contribute to my Europe trip to enrich my culinary skills (#hungry4Hungary).
In this environment, this explosive rise in ICOs has invited many comparisons to the IPO craze during the Dotcom Bubble of the late 90’s, which pushed the Nasdaq to its then-all-time-high to losing almost 80% of its value shortly thereafter. Investors at the time struggled to climb out beneath the heaving corpses of the likes of webvan.com and pets.com.
“Whoever fights with monsters should see to it that he does not become a monster in the process. And when you gaze long into an abyss the abyss also gazes into you.” — Friedrich Nietzsche
So, are ICOs today like the IPOs of yesteryear? Interested in learning about what my fellow humans were investing in, I decided to “turn over the block” and see what would crawl out from underneath. My crime scene of choice was the website CoinSchedule, which boasts that they “only list cryptocurrency ICOs and projects worth following and investing”.
Right at the top of the list, I found Gilgam.es, an e-sports platform governed by smart contracts, offering 120 million coins. As an e-sports enthusiast myself (to the dismay of my long-suffering girlfriend), I couldn’t wait to read more about this group’s strategy to create a secure, competitive environment for professional gamers and mechanism for e-sports betting.
With heavy anticipation and even heavier mouth-breathing, I opened up their absolutely gorgeous website to read their white paper, an informational document and proposal that explains the ICO’s concept. As my eyes scanned through the 19-page document, my curiosity began to dissolve into a peculiar eldritch horror.
I could feel my right eye twitch as it tried to burrow back into my brain. As a consultant, I have really seen some shit. But I came prepared to read watches, not tragedies.
The closest thing to a roadmap was the phrase “planning & preparing” injected into a sentence. The punches kept coming. Two entire, generic pages on the potential of the e-sports market that had clearly been ripped out of an undergrad student’s report that barely meets the word limit (because he already had an A in the course so whatever). Nine pages of the paper devoted to crowdsale rules and risks. No financial projections or justification for the funds raised other than a single pie chart (Administrative — 15%, Tech Development — 50%, Sales/Marketing — 20%, Legal — 5%, Misc — 10%). Seems good.
I decided to page back to their sleek website so I could remember what it felt like to live and love again. Then I noticed the conversion rate of GG coins to ethereum. After some back-of-the-envelope math with the 120 million GG coins intended for ICO circulation, I had a startling realization. In the absence of any financial data, apparently the developers value their website, 19-page e-sports market report, and beautiful minds north of $43 million.
Another day, another ICO.
At the time of this writing, and at ethereum’s current price, they have already raised $700,000 USD for tokens on a completely non-existent and purely theoretical smart contract gaming platform whose coins can only be used within its ecosystem. This would be like buying a heapload of non-refundable tokens for Chuck E. Cheese’s, except none of their stores exist yet and you don’t know when or where they will be built, if ever. And you didn’t even get pizza out of it.
In the mood for more punishment, I returned to CoinSchedule and clicked another one at random.
7ype proclaims itself a “cryptocurrency token for movie productions”. While the website did not have all the bells and whistles you would expect for a listing in this hyped-up ICO market, this coin was interesting in that it appeared to be the brainchild of one person, actor Samuel Victor. The goal was to raise a casual 5000 eth (approximately $1M at today’s eth prices) in return for tokens that allow the holder to buy producer credits on movies and other perks, similar to Kickstarter. This rather circuitous and chummy “abbreviated” white paper did its best to bring the hype.
This type of public figure-led or endorsed ICO is not uncommon, and upon closer inspection I could not ignore several red flags. First, Samuel Victor writes in the white paper that it’s the “simplified version” and that the forthcoming “full version” will have much more information and expand more on the “ideas and points and explanations and proof of certain concepts”. Wouldn’t it have been best to release the complete document before the ICO went live?
Blowing aside all the smoky pages in the white paper about his credentials, knowledge of the movie industry, and general trends in the cryptomarket, there was not much substance. As a 7ype investor, you would just need to take him at his word that there would be opportunities to actually use these coins and that multiple directors have 20 films lined up for this venture. In fact, this lack of detail was even celebrated within the white paper, claiming that its brevity was the result of honesty, transparency, and “plain English”. Naturally, the “details will be provided later for those who want it”.
If you really dig deep, 7ype kind of 2nd-degree Kickstarter; instead of donating money to support presumably indie films and receiving certain perks in return, 7ype investors are in effect giving money directly to Samuel Victor to subsidize a set of movies on his slate. While we don’t get to hear much about his team or how he can guarantee any of this will happen, a least investors are rewarded with what are essentially “perk IOUs” to be redeemed at a later date.
The Junk ICO Playbook
That said, a large percentage of the .com companies simply didn’t make it. They failed partly because the vicious competition that investors conveniently ignored, partly because the ideas themselves were not viable, and of course partly because of the fraudulent IPOs, which were only created to milk the unstoppable flow of capital. — Mate Cser from Hacked.com, on companies during the Dotcom Bubble
Even from just these ICOs and associated white papers, a pattern emerges. Vague, colloquial white papers, slick presentation, and broad appeals to industry trends seem to be the norm. Check out this tongue-in-cheek article on how to create an ICO scam and do your own comparison with any of the innumerable ICOs out there — I guarantee that many of these characteristics are spot-on.
Obviously, I am not suggesting that legitimate ICOs don’t exist, but at the same time we should acknowledge that even then it is a spectrum. Look at Tezos, a very popular ICO with a significant amount of meat on its bones. It has a clear value proposition focused on decentralized governance and a voting system.
Yet, this ICO also pioneered the idea of its founders receiving 8.5% of fiat (USD) proceeds from token sales along with the standard 10% token allotment. This means that even if the entire project fails, its creators will still make out like bandits. Very bold.
If the FOMO is too strong and you must hop on the ICO train, I strongly recommend you think deeply about how you might properly evaluate each opportunity. Notice the questions listed in this article by William Mougayar and ask yourself how many ICO white papers are comprehensive enough to cover them to your satisfaction.
So how does this crazy ICO world we live in impact the big picture? I am very curious to see how this massive coin influx will affect the steady march toward a future wired on blockchain. I think there will be implications in at least these three areas:
Adoption and the Cryptomarket
Blockchain tech has definitely come a long way, but looming and ominous technical problems involving a complex balancing of security, scalability, and speed continue to dog every manifestation of it. Add a universe of volatile, fraudulent ICOs to this and the future seems ever distant.
Whether the focus is on mainstream adoption of the technology or increasing participation of investors in the cryptomarket, the sheer glut of frivolous IPOs depletes both attention and resources.
On the technology side, the sheer amount of poorly thought-out money grabs hearkens back to the early days of Bitcoin and its inescapable stigma as the currency of the underworld. Every altcoin, poorly executed project, and negative news article can only impeded business and potential end users’ adoption of legitimate blockchain platforms and Dapps, all of which are still struggling to expand their accessibility.
Skeptical that people really invest in altcoins and crazy ICOs? “Dogecoin”, intended by its developers as a joke based on a meme, has a market cap between $200–250M. You can’t explain that! Source
In the cryptomarket, an unregulated purgatory already plagued with uncertainty and almost every risk you can name, the onslaught of ICOs can be felt most viscerally. Even extrapolating from the white papers discussed in this article, it is evident that many of these ICOs are only interested in converting their crowdfunded Bitcoin, ethereum, and other cryptocurrencies into fiat (USD) as quickly as possible. After all, Lambos aren’t cheap.
In effect, ICO investors are subsidizing massive selling in top cryptocurrency exchanges and markets, introducing massive volatility and even exchange crashes. While this unpredictable behavior may simply be a huge nuisance and humongous heartbreak to high frequency traders in the short term, if the demand for ICOs continues to grow beyond its current rate we may be stuck in price discovery limbo for a long time.
Given how little regulation exists for trading crypto and selling tokens that are not backed by equity, market manipulation is a fact of life in these markets. There is truly a Sword of Damocles hanging over every price action, with mega-ICOs like Tezos holding massive war chests of ethereum that could be unloaded at any moment.
How does all this factor into the long term? Perhaps the worst case scenario is that the ICO fever continues to build to critical mass, leading to massive quantities of Bitcoin and eth being dumped so catastrophically that the bubble finally pops.
Regulation
Given all the market manipulation discussed, we can presume that regulatory pressures will eventually hit the cryptomarket and blockchain tech as a whole. This could certainly be a double-edged sword; in the long run, some level of regulation to combat blatant market manipulation would bring some welcome stability. However, the uncertainty of new regulations, whether designed or implemented, are almost certainly inimical in the short term as development teams struggle to adapt and the market masticates on the potential ramifications.
Another consideration is simply when these regulations will come, and even when they are implemented, how appropriate will they be for increasing transparency, security, and stability without introducing even more harmful externalities? The uncomfortable questions and grey areas continue to bleaken the view toward an end-state future built on blockchain.
The U.S. meanwhile was described as having an “alphabet soup of regulators” that makes issuing tokens more complex. Then there’s also the individual 50 states that implement their own rules, such as the so called “BitLicense” in New York, and Delaware, the “home of American incorporation”, which has introduced a variety of blockchain-related legislation. — Coindesk
As if our already complex galaxy of financial law at the state and federal levels weren’t enough, I can only imagine the brain damage the investment and business community will sustain under the crippling volume of new crypto regulations as states and countries figure out what works. It’s an exciting time to be a part of the U.S. Securities and Exchange Commission (SEC), Commodity Futures Trading Commission (CFTC), and Internal Revenue Service (IRS) as they scramble to identify the needed expansions to tax law and provide oversight of the rising tide of sophisticated crypto options, swaps, and derivatives.
Then there’s the fact that these would-be regulators would need to keep pace with the relentless innovation and whirlwind of theory within the blockchain space. Will the people behind these government entities have the technical understanding to avoid blanket, one-size-fits-all regulations that end up stifling progress and adoption?
Your guess is as good as mine, but I can tell you that the bolder the teams behind ICOs become, the more likely blockchain tech will dominate the radar of authorities and accelerate the inevitable coming of regulatory action. Let’s just hope they don’t throw the baby out with the bathwater.
Venture Capitalism
While the writing was on the wall since the earliest, successful crowdfunding experiments, VC will for sure have to evolve over the decade to address these challenges. While some of the drawbacks about VC that led to crowdfunding (need for accessibility and agility) haven’t changed, I don’t foresee VC going anywhere — in fact, I envision that venture capitalists will actually serve a central role in increasing the quality of legitimate ICOs while facilitating execution.
Concerns about societal stewardship and the conception of necessary regulations usually lag creativity and innovation. Even with the breakneck pace within the tech industry, VCs are in a unique position to add significant value and build stability into the cryptomarket ecosystem.
To development teams, VCs offer experience and mentorship while acting as “smart money”. Not only do they make sure the funding flows to the wheat while separating out the chaff, the time they save developers in terms of achieving market fit, drawing upon the right people, and identifying the correct distribution channels could well make up for the initial friction that due diligence and transparency demand.
Cooperation between VCs and legitimate ICOs before a round of crowdfunding can and should be a win-win. The team will gain access to the requisite incremental funding needed to reach optics-friendly benchmarks, while at the same time leveraging the wealth of knowledge from the VC firm to apply the resources raised from crowdfunding in an optimal,strategic manner.
Meanwhile, VCs will have the opportunity to penetrate an insanely lucrative area of growth that is far more liquid in comparison to traditional investments where seed money is locked up until the IPO. If VCs and prospective ICO teams can find a way to connect in an effective manner, investors will have a much easier way to filter out the “junk” offerings that would crumple under any reasoned scrutiny. Perhaps a blockchain innovation will facilitate this one day!
“According to CoinDesk data, funding for ICOs has already surpassed traditional venture capital banking in 2017.”
In many respects, the situation today could be even more dire than during the late 90’s. As Mark Cuban notes, at least the IPOs then were of publicly traded companies and you had a measure of liquidity. Today, ICOs prey on private investors, dangling a technology that no one knows how to value yet.
So why is this bubble far worse than the tech bubble of 2000?
Because the only thing worse than a market with collapsing valuations is a market with no valuations and no liquidity.
If stock in a company is worth what somebody will pay for it, what is the stock of a company worth when there is no place to sell it?
Look around us. Rome has begun to burn. Junk ICOs and the people who love them continue to dilute blockchain’s credibility and accessibility to businesses and the general public. The ability and appetite for coin crowdfunding have emboldened opportunistic developers to cut out VCs and traditional due diligence and transparency to enrich themselves in lieu of creating actual solutions to advance the blockchain cause. All of this continues to propagate in a regulatory vacuum that is a symptom of the tremendous learning curve of this new tech and its implications.
Nobody knows when the regulators will drop the hammer. Nobody can tell you when the so-called bubble finally pops. Nobody knows how deep the ICO rabbit hole will go. The only thing for certain, other than death and taxes, is that there will be blood.
And that’s pretty exciting.