“ICO’s will not go away. For the first time in financial history, founders can access capital from both large and small investors armed with nothing more than a slick website. No regulatory filings or egregious investment banking fees are required to raise capital. The capital of the 99% is there, and they are hungry to participate in the success of the next Google, Facebook, Tencent etc.”
From Bitmex’s excellent blog written by CEO Arthur Hayes Co-Founder & CEO, BitMEX
But before we delve further into Hayes’ insight commentary, let’s back up a bit and do a FAQ on ICOs
What is a Intial Coin Offering?
Startups built on blockchain technology—distributed ledgers that power cryptocurrencies like Bitcoin—are turning to “initial coin offerings,” (ICO). Instead of doing a private placement, or accepting private equity, the starups issue their own digital currencies, or tokens, that anyone can buy (emphasis mine). Proceeds from the auction of these virtual shares help fund the businesses.
Think of an initial public offering, when a company traditionally lists on a stock exchange. The difference is that whereas IPOs are well-defined and understood by governments, ICOs are murkier (actually it’s the wild, wild west DJ). The U.S. Securities and Exchange Commission and other regulatory agencies are currently investigating the practice (Translation: Doing nothing about it right now DJ). The tokens, proponents say, are not quite like a security, yet not quite like a currency either. They’re something in between.
What is the difference between an ICO and a IPO
At ground level, if you want to participate in an Intial Public Offering (IPO), you phone or email your broker and ask him/her to put in a bid for a number of shares. We are assuming you have a brokerage account.
And a broker who can get you a piece of the action. If your bid gets through, you get issued share certificates that you don’t ever see but gets dumped in in your account. One day, hopefully, you sell your shares for a profit. Or you die and your kids sell it for whatever they can get.
At every stage of the process, there are multple vettings by securities lawyers, regulators, and other government officials to ensure that shareholders don’t get ripped off. With the major exchanges, that works most of the time, at present. With minor exchanges, that’s how it supposed to work, but…(opinion edited out on advice of lawyer)
Now with a ICO, you have to have either some Bitcoin or Ethereum either in a wallet or a cryptocurrency exchange. You surf the web until you find the website of whatever startup is offering the ICO-of-the-day. You check the very-nicely designed website until you find the link that usually says (and I’m paraphrasing) TAKE MY MONEY PLEASE. Then you click on the link and the website gives you an address to send your Bitcoin or Ethereum. You send the cryptocurrency and they (usually) give a peronal account on the website that shows how much cryptocurrency you’ve deposited. Then, after the ICO, they hopefully release whatever coin you bought and you pray to whatever God you have in your heart, that there is a cryptocurrency exchange that will accept whatever coin you just bought.
I am not kidding about this. No lawyers or government officials involved. I assume you checked out the website and the startup founders are not based in Nigeria?
Who would invest in such a thing?
Well, I’m on my third one this week.
Are you insane?
Well give me a couple of drinks at a party and I think I can hit the “fun” level for a few minutes before the better half shuts me down. But certifiable? No, I pass the test everytime, and the kids still don’t have power of attorney.
Do you like losing money then?
No, but since I’m not infallible, that comes with the territory. But look I get what you are saying. Are these types of investments risky? They are so risky that they stretch the meaning of “investing.” But come on, have you ever participated in a private placement on the Toronto Venture or CDNX? I mean really, medical marijuana stocks are hot right now? Oh look the largest one in Canada has a market cap of more than $1 billion.
And those are the good deals. I mean have you ever read a prospectus from CDNX which is so bad you actually put the sheets of paper down on the desk so you can have a small hysterical giggle? Then ram those prospectus sheets down the shredder so hard you jam the slot and then you have to pick out the shards of paper with a fork?
If you haven’t done so, then I suggest you haven’t read enough prospectuses.
Okay I get it, I get it, but seriously what is the track record of these ICOs?
So far, stunningly good, hence the mania. One of the oldest coins, MAIDSafe did an ICO in 2014 and the roll-out was considered a complete muck-up at the time. They raised $6 million. At present the market cap of the MAIDSafe coin is about $215 million. Is that too ancient for you? Well MobileGo raised $26 million last month and the market cap is now more than $100 million.
Good heavens when will this mania end?
Nobody knows but I leave the final word to Hayes:
“Pop Goes the Weasel”
“The Bancor ICO set a new benchmark. The $500 million mark is my mental goal post for the height of insanity and that will be the day that Icarus will burn in the noon day sun. Tezos and or Eos are positioned to meet or eclipse that number.
My second mental goal post is if Ether reaches parity with Bitcoin in terms of market cap. The profit taking at that level could cause the ripple that forces a calamitous unwind of the 2017 ICO bubble.
The correction in Ether and the secondary market prices of ICO tokens, will be disorderly. However, even if you do agree with my views, don’t let your haterade preclude you from making money during this glorious bull market.”
I hsve to go now. The Monaco ICO is closing in a day or so, and I have to get my order in.