Initial Coin Offerings — what’s in it for me?
In order to make a market you need buyers and sellers. Initial Coin Offerings ( ICOs) the buyers are those people who are putting up their cash and the sellers are the organisations launching ICOs and the tokens sometimes referred to as Cryptocurrencies.
There are now reportedly over 14 million wallet holders, and once Kin.Kik.com launch their ICO if they give away tokens to 15 million of their users, there will be nearly 30 million people who are holders of various tokens that have a value of $90+billion.
The sellers of ICOs are organisations that want to raise capital and can now do so quickly, and at a fraction of the cost of more traditional methods. Currently there is very little regulation around ICOs, which means that the normal army of lawyers, bankers, accountants and brokers who typically carry out due diligence and back ground checks are not required. There have now been over 900 ICOs and, so far in 2017, they have raised more money than Venture Capitalists (VC). This, in itself, is making some VCs to question their role as to consider — do they need to offer something different? ie knowledge, not capital : A white paper published online replaces weeks of pitches to VC firms, followed by an online auction that can take minutes. The technology can be poked and prodded by geeks around the world, providing a depth of expertise often missing at even the best Silicon Valley firms.
VC are investing in ICOs Brad Burnham, partner at Union Square Ventures, says “The trend of crowdfunding by issuing your own token could also disrupt traditional venture capital, which Burnham welcomes. “It means the creators, innovators and entrepreneurs are participating in that value creation, and not the financiers” But is that such a bad thing?
Many of the ICOs to date are from small companies where the founders have developed or want to create a new business using the latest technology eg Blockchain, AI, Big Data etc. Historically they would have had to get friends or family to invest or re-mortgage their home and borrow from the bank. One of the biggest problems that small firms have, whether they are quoted or not, is a lack of liquidity in their shares ie it is often difficult to get your money back once one has invested in to them.
In theory a company which is quoted ought to be able to raise more capital by issuing shares. In the UK there are over 600 quoted firms that have a capitalisation between £2m and £50m, but one can struggle sometimes to buy and sell their shares due to a lack of liquidity. It is one of the principle reasons why institutional investors i.e. large pension funds, mutual fund managers charities and Venture Capitalists (VC) do not invest a lot in small companies.
However with ICOs we are seeing a relatively large number of people investing, and often the average participant is committing less than £500 at a time. Forexample a company called Humaniq raised $5million from 11,860 people ie an average holding of only $435.This is important, as in many ICOs there is not a concentration of large holders who could suddenly sell their tokens and alter the price. When you have a large number of token holders, it is unlikely everyone will want to sell at the same time as different people are holders for different reasons. The fact that many ICOs have lots of small holders may indicate that token holders are becoming more diversified, holding a selection of tokens in variety of firms. This is spreading their risk, and hopefully over will time create a less volatile token market for all.
It is has been said that ICOs are in effect democratising capitalism in the world of new tech start-ups. They are helping to create a level playing field whereby ‘Joe public’ is able to invest in along with VCs, institutional fund managers and the super-rich. This is long overdue as confidence in banks and institutions has been on the decline for decades. In the UK 19% of people think banks are well run compared to 90% in 1983.
The percentage of ordinary people putting their money directly into the stock market and owning shares has been falling since the 1960s. From over 60% holding shares to now — a little over 10%. Part of this is due to people buying mutual funds as opposed to direct shares, and partly because even those shares that are not in funds are often held in nominees names i.e. if they are part of a private portfolio management service. This helps to explain why institutional investors are becoming more dominant and such a driving force in stock markets globally.
Another factor that has had impact on the equity market is, that in the past, many people have relied on their employee to provide a pension, but many governments around the world are now actively encouraging personal pensions and getting employers and employees to contribute to them. This is forcing employees to think about their savings and consider where they are invested. These new pension arrangements offer the ability to invest in a wide range of assets, and in time they could further provide more capital for ICOs.
The level of awareness and interest in ICOs is being fuelled by the press with articles are appearing on a global basis including BBC, CNCB, Economist, Bloomberg, the Süddeutsche Zeitung in Germany, Barrons in the US and the FT. These media outlets want to inform and educate but is also it is difficult to ignore the phenomenal gains in token prices like Ripple which has grown by over 5,000%, Ethereum which is has also risen over 2,700% since January 2017. What is also impressive is if you look at the value of tokens that have been bought and sold i.e. traded. Ripple have had $126million, Ethereum $3.3billion and Bitcoin $4.6 Billion worth of tokens traded in just the last two weeks!
Arguably ICOs and the tokens they have created are a new asset class which could be a real alternative to just investing into shares, commodities, property and bonds. Currently as ICOs and tokens are not regulated there are very few funds for one to invest in to ICOs. It is possible for UK individuals to hold Bitcoin in your pension. Whilst this gives you the ability to only hold Bitcoin, currently valued at $41 billion, other types of funds that will hold a selection of tokens that will be managed for you are likely to be launched over the next few months.
Having some of your money into spread of tokens via a fund for the longer term is probably safer than trying to guess which ICO to pick, as it is most likely that we will see the price of tokens continue to be volatile.
So what is in it for me? Well we may be witnessing the creation of a new asset class that will potentially offer new investment opportunities that do not go up and down in value at the same time as other investments. ICOs are also acting as a source of financing to help organisations grow and create new jobs. Clearly not all will succeed but it is likely ICOs could well help finance the next Apple, Google, Facebook and wouldn’t you like to be in at the start this time?
Jonny Fry CEO TeamBlockchain Ltd Email:Jonny.Fry@teamblockchain.net Twitter:Jonnyfry175