ICOs: Venture Capital for Mere Mortals

womanmoney-800pxAn Initial Coin Offering (“ICO”) is a method by which entrepreneurs raise money via cryptocurrencies. In the typical ICO, a company floats a proprietary digital token on a network such as Ethereum and accepts Bitcoin, Ether, or another cryptocurrency in exchange. These new tokens represent either shareholding or participatory privileges in the fledgling business. Ethereum has been a game changer for such enterprises, having served as a platform for most issuances.

These ICOs represent the beginning of a fundamental shift in how high-technology businesses are funded. In the past four decades, angel investors and venture capitalists got behind great ideas and funded them. Private equity funds then took up the gauntlet in second stage funding and ran to the IPOs. By the time these companies listed on stock exchanges and shares made their way into the hands of individual investors, the venture capitalists and the private equity funds had locked in massive returns on capital. Few individual investors could hope to match the kind of profits that early investors generated. Well, one could certainly invest in a Private Equity fund, but in most regulatory jurisdictions, you would need about a million dollars to join.

The game is changing. Today, lay investors with a rudimentary understanding of how Cryptocurrencies work have the opportunity to make early-stage investments with as little as USD 100. The ICO revolution puts early-stage investing and its profit opportunities within the reach of ordinary investors. For instance USD 1,000 invested at Ethereum’s ICO in 2015 would today be worth USD 230,000!

There are risks though. Venture capitalists are high risk takers, and are comfortable with the possibility that their entire investment in a particular company may be lost. Even Private Equity funds, though somewhat more conservative, play similar odds. For an individual investor with a focus on capital preservation, this may be a poor thesis on which to build one’s retirement portfolio, but this does offer a credible and low-cost opportunity to add some high-reward risk to a conservative portfolio.

The fraud risks are immense. Information on internet directories suggests that the time of writing, there are over 100 companies at various stages of the ICO process. Naturally, performing adequate due diligence on these is a huge challenge. The only resources that investors have are the LinkedIn profiles of the principals of these companies and a webpage that contains information about the supposed product. As the frenzy kicks up, it is entirely possible that fraudsters conduct an ICO and divert the proceeds. The decentralized nature of Blockchain enterprises will make such fraud impossible to investigate or prosecute with the current state of Law, as investigative agencies lack jurisdiction across international borders.

Regulatory risks abound too. Though multiple governments are warming to cryptocurrencies, these are largely considered to be a fad among technology enthusiasts. As interfaces with the traditional financial systems increase and cryptocurrencies become more influential in moving markets, the possibility of stronger regulation increases, and “investments” in these tokens may be challenging to liquidate.

The biggest risk though, is that most Blockchain startups are based on arcane concepts that are beyond the understanding of the average person. While these systems and platforms represent engineering genius, as a utility, they are irrelevant to 90 per cent of the world’s population. Furthermore, many of these projects are conceptualized and executed by young and passionate entrepreneurs. While their technical skills and intentions are beyond doubt, it remains to be seen if their business skills are up to the mark in riding the wave of disruption that they are about to unleash. Browsing through these ICO Prospectuses (or white papers as they’re called), it’s obvious that most of them are aimed at solving fundamental problems related to service delivery, financial inclusion, and even healthcare – however, whether these platforms will actually make the change that they envision is up for debate.

Cryptocurrencies, as an asset class, have delivered outstanding returns in what seems to be blowing into a bubble. Thankfully, newer digital assets such as Ether, Gnosis and Aeternity tokens have a functional aspect that will add fundamental value to them as time passes. For instance, Bitcoin has notional value like paper money, and there is a possibility that the currency will collapse once mining it becomes unprofitable. Conversely, Ether is the sole mode of payment of transaction fees for a growing number of applications on Ethereum. As these apps increase in number and grow in user base, the fundamental value of Ether will increase.

In conclusion, if the idea of owning a piece of a high-potential technology business is appealing to you, looking up ICOs may be worth your time.

Start your Cryptocurrency journey by buying Bitcoin via Unocoin

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Cryptocurrency Classism is Here

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Cryptocurrency is becoming classist.

This is particularly dismaying, because if anything, cryptocurrency networks have the potential to drive financial inclusion on an unprecedented scale. Ethereum-based ICOs can bring early-stage investing to ordinary individuals, giving them the opportunity to add some risk to their portfolios at a reasonable price. However, cabals of insiders are forming.

In June 2017, cofound.it, billed as a Blockchain venture capital fund, had its ICO. This ICO was purchased entirely by a group of insiders who had the cofound.it “Priority Pass”. To get on this priority list, you need to have a minimum of 5000 CFI tokens in your wallet. This token is currently priced at USD 0.25, meaning that you need a deposit of about USD 1,250 with cofound.it to participate. Cofound.it’s first partner ICO – Santiment – is allotting a portion of its tokens exclusively to CFI Priority Pass holders. Looking at Santiment’s white paper, this is particularly worrying, as Santiment aims to be the leading provider of Cryptocurrency market information. If this “vision” materializes, the Cryptocurrency market will mimic the uneven playing field that the global capital markets have become. It is highly possible that these Santiment “insiders” will have preferential access to both information and platforms and will possibly drive the agenda of what Santiment pushes to the public.

So where are we headed with this? This trend is not going to slow. These cabals of insiders will continue to grow stronger, and will extend their influence in the cryptocurrency sphere. Services like Santiment will have the power to make or break any upcoming ICO. In addition, as algorithmic trading systems become increasingly active on cryptocurrency markets, data cues will drive broad-based market movements. In the worst-case scenario, the entire cryptocurrency industry will become a casino, where optimistic lay investors will hope to make a fortune, while a bunch of insiders will laugh all the way to the bank. In the end, we will be left with the cesspool of collusion, corruption, and deceit that today’s capital markets have become.

The Cryptocurrency Party is Just Beginning

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As of writing, Bitcoin is trading at USD 2,630, having surged from around USD 800 since January 2017. In addition to Bitcoin, other Cryptocurrencies have seen a surge too. Ether, another “digital token” that is intended as a medium for paying transaction fees on the Ethereum computing platform has risen in value from USD 10 to about USD 300 in the same time period. Other Cryptocurrencies such as Ripplecoin, Zcash, and Dash have also seen an explosion in value.

What are people saying?

Public opinion towards Cryptocurrencies has always been divided. However, with the new surge in the market, opinions have become even more polarized. Sceptics hinge on Bitcoin’s first impression as being a black-market currency and call this a bubble, while proponents contend that this is a global currency that is just going mainstream and can indeed go way higher.

So what is actually happening?

A number of market observers are right in noting that Cryptocurrencies are exhibiting bubble-like behavior. For Bitcoin, which isn’t backed by a central bank or doesn’t have a market regulator, this is particularly true, as its value is purely notional. Ether, a digital token that is incorrectly regarded as a Cryptocurrency, has real-world utility, but is still in an early experimental state that does not justify its current market price. In addition, the potential supply of Ether is infinite, unlike the Bitcoin – which has a finite supply hard-coded into its design. Long story short, the critics are right – we ARE in an ebullient Cryptocurrency bubble, and a painful correction is certain – but not imminent.

Why is this happening?

Skepticism notwithstanding, Cryptocurrencies are taking baby steps to going mainstream. In many countries, authorities are actually studying Cryptocurrencies, and exploring ways to regulate them. Even in notoriously conservative regulatory jurisdictions like India, sites like Unocoin are permitting people to buy Bitcoins for cash. Zebpay, another platform, allows you to make small payments using the currency. Each passing day, Bitcoin in particular inches close to mass acceptance and has thousands of new users signing up.

Value as a currency aside, the Blockchain technology that cryptocurrenices are based on has tremendous potential. Ethereum, as a technology platform, has just begun to explore this. A number of Ethereum projects such as the DAO, Akasha, and Gnosis have received an enthusiastic response from the market and have been successful in raising millions of dollars in funding. Today, hundreds of companies, in technology, banking, media, communication, and logistics are looking at ways that Blockchain technology can be leveraged for profit. When these efforts mature, platforms like Ethereum will achieve their true potential, as their Software as a Service (“SaaS”) offering will give users access to obscene computing power at a minuscule cost.

The most prominent factor in this bubble right now, is the Cryptocurrency casino. The utility of the Blockchain and the growing acceptance of Bitcoin do not entirely justify the surge in Cryptocurrency prices. However, millions of people around the world have discovered the speculative opportunities in Cryptocurrencies and have begun to trade them for profit. In fact, all Cryptocurrency trade today may be attributed to speculative trading, as the amount of Cryptocurrency used for actual transactions is microscopic. This is not unprecedented. According to the Bank for International Settlements, global trade in foreign exchange (“FX”) was about USD 5.4 trillion per day in April 2016. Incidentally, the total value of the world’s money – currency and bank deposits – is about USD 81 trillion (Source – CIA World Factbook – 2015). To put this in perspective, money equal to all the notes, coins, and bank deposits in the world changes hands every 15 days on the world’s FX exchanges. This entire market is speculative – run largely by multi-million dollar computers playing against each other. In comparison, the cryptocurrency market, valued at around USD 60 billion, is negligible.

The Cryptocurrency market is gaining in speculative appeal, but this journey is just beginning.

The Japan Factor

Japan is the most mature market for FX speculators in the world. Ordinary Japanese citizens generate a trading volume of hundreds of billions of dollars each week. Starting April 2017, Japanese regulations have made it easier for their citizens to trade Cryptocurrencies, especially Bitcoin, and as the chart below shows, a large part of Cryptocurrency trading today is in Yen. Bitcoin, with its massive swings, is the perfect currency for a bold FX trader. In fact, the mainstreaming of Bitcoin will accelerate now that Governments are taking notice.

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The party is just beginning

The number of people trading Cryptocurrencies is increasing. Global events that harm public faith in institutions are accelerating acceptance by lay people. Major moves in cryptocurrencies can be seen after events such as Brexit; the demonetization of high-denomination notes in India; and anti-speculation measures by Chinese regulators. An increasing number of freelancers are accepting Bitcoin for international payments to avoid expensive bank fees. With each passing day, people are finding new use for Blockchain technology and are solving complex technological problems with platforms such as Ethereum.

The market for speculation is growing rapidly, as a number of highly secure and versatile trading exchanges are offering investors the option of trading Cryptocurrencies against regular currencies. These exchanges form strong and influential interfaces with the mainstream financial system. Indeed, a number of derivatives houses are already writing “exotics” pegged to cryptocurrenices. As such activity grows, Cryptocurrencies will attract more investors and the resultant demand will drive prices higher.

The entire market will see expansion. Unlike conventional currencies, Cryptocurrenices are freely traded against each other. This creates arbitrage opportunities between pairs and exchanges. All major Cryptocurrency exchanges permit algorithmic trading by end users. Large scale exploitation of arbitrage opportunities will cause prices to even out in the long term. The wide swings seen in recent years will become increasingly uncommon, and as platforms like Ethereum increase their operational utility, the trends in individual currencies and tokens will lean towards fundamentals.

There WILL be a crash

From Tulip Mania to the Dotcom bust, rabid speculation has always led to devastating crashes. This is likely to happen even with cryptocurrencies. Thanks to platforms like Ethereum, there is now a low barrier of entry to Cryptocurrencies. Today a lay user with minimal experience with solidity – Ethereum’s programming language – can institute his own currency and even make it freely tradeable with minimal effort. Projects like DAO and Gnosis are large-scale examples of this. Additionally, rapid advances in computing, networking, and storage technology will uncover deficiencies in existing cryptocurrencies, leading people to newer products and causing obsolescence of older ones. Many people who trade wildly will be completely wiped out.

And then a resurgence

However, like the Dotcom bust preceded a fundamentally sound expansion in the Hardware, Internet, and Mobile sectors, the fundamental appeal of Blockchain technology WILL drive resurgence in the industry and bring about mainstream businesses in Blockchain. Indeed – a Blockchain-based ERP system would be impossible to manipulate in order to deceive investors, regulators, or tax collectors. Corporate entities structured in “smart contracts” on platforms such as Ethereum could do away with Audit and Compliance functions entirely – saving massive amounts of money that could be better applied to innovation or worker welfare. Cryptocurrencies and Blockchain are here to stay. Will we one day have a global economy where money and services flow freely across international borders free from protectionist measures and oppressive taxation? Blockchain and Cryptocurrencies can deliver – but today, we can merely dream.