An ICO (Initial Coin Offering) is a new way for startups, particularly blockchain-based ones, to raise money. It’s an ingenious method of both raising money and incentivising people to use your product. The problem is, ICO valuations have risen to absurd levels. Also many ICOs don’t bear close scrutiny, which will be a problem when worldwide regulators start to crack down on them. That’s looking more likely after two news items today.
Firstly, Bloomberg reported that the U.S. Commodity Futures Trading Commission sent subpoenas to Bitfinex (a prominent exchange) and Tether (a company run by the same people, that issues a coin supposedly pegged to the US dollar). While this news doesn’t directly impact ICOs, it signals that US regulators are now starting to look more closely at cryptocurrencies.
Also today, Facebook announced a new policy prohibiting ads “that promote financial products and services that are frequently associated with misleading or deceptive promotional practices, such as binary options, initial coin offerings and cryptocurrency.” If Facebook is turning down ad revenue, it must be serious!
Should we be worried? Yes, because it’s become clear that many ICOs will eventually fail – and some are outright scams. As one of Bitcoin’s most respected experts, Andreas Antonopoulos, said last year, “I’m sure there are some [ICOs] that are very interesting, but at least 95 percent of the ICOs out there have none/very few of the basic fundamentals.” His advice for ICO companies: “If you have a viable product… build it first and they will come.”
Indeed that’s what most unsettles me about ICOs: they usually have either a very immature product, or no product at all. If I compare it to angel investing, which I’ve done a bit of, I want to at least see a working prototype – and preferably know something about the underlying code – before I’ll consider investing. Yet many people are throwing money at ICOs based not on a working product, but on the often vague promises of a whitepaper.
In my Stuff column this week, I looked into a local New Zealand company, Centrality, that claimed to have raised US$80 million in a “Token Generation Event.” That would make it one of the top ten biggest ICOs of all time! But when I looked closer, I found no evidence that Centrality has blockchain technology running in the products it owns or has a stake in. Centrality also hasn’t open sourced its codebase, although it says it will do that soon.
Despite having little more than a 49-page whitepaper to showcase, Centrality’s token event apparently attracted over 8,000 people. On average they invested US$10,000 each. Now, Centrality may well turn out to be a solid company. But based on current evidence, it’s a highly risky investment.
All that said, there are ICOs out there which look solid. For example, even though it hasn’t yet released its final product, Augur has open sourced its code, it has a large and strong developer community, its founding team have credentials and respect in the technology industry, it undergoes audits that are published, and it regularly updates people about its progress. These are the kinds of signs you should look for when evaluating an ICO’s real value. (Ok, whether Augur is worth $750 million market cap right now is another question!)
I still think ICOs are a great innovation, particularly as a way to raise money for startups. But I would welcome more regulation, to weed out the bad actors.
In the meantime, it’s buyer beware. Please do your homework before you consider investing in an ICO.
Great piece Richard 🙂 Think it’s high time the ICO wheat got separated from the chaff. I also think that viability comes down to the tech product and how useful it is. And that’s where investors should exercise caution too – if they’re just doing it to make money then they’ll lose out, pure and simple.
Thanks Dave 🙂 Great points. Also worth checking the competition. In Centrality’s case there are others doing an app marketplace, e.g. Status.