ICO and Cryptocurrency? An Opportunity for Unbiased Thinking

Have you been reading all the press coverage warning you about the impending ICO/Cryptocurrency bubble burst? Check out the data for yourself, consider the various interests involved, and form your own opinion.

The financial press has been generating noise for quite some time about the impending ICO bubble burst, and it is worth taking a closer look at the figures to put things in perspective. In 2017, so far at least, ventures raising money by issuing new cryptographic tokens via an Initial Coin Offering (ICO) have collectively raised just under $2 billion. That’s quite a lot, to be sure, but far from the $50 billion raised through VC funding and even further from the $80 billion raised in public offerings in stock exchanges worldwide – 25 and 40 times as much, respectively – over the same time period. While it’s true that there have been companies who have raised tens or hundreds of millions of dollars in offerings that weren’t properly verified or that had clearly underdeveloped products and business models, all ICOs combined still haven’t come even close to the $3.4 billion raked in by Snap.

The central argument against ICOs is that the market is unregulated. This is a valid concern worthy of consideration. The term ‘regulation’, for some, tends to conjure a stifling sense of imprisonment in a windowless room, but regulation has a very important role in keeping markets fair and accountable. This means: (1) making sure money isn’t used for criminal activity such as drugs or weapons trafficking, (2) providing equal access and opportunity while also protecting the unsophisticated or uninformed investor from scams and manipulation by the rich and sophisticated, (3) preventing power from accumulating in the hands of monopolistic or harmful enterprises, (4) securing the personal and financial stability of participants and bystanders, and (5) formalizing taxation.

It seems to me that even the most adamant advocates of regulation would be discomfited by its administration in traditional channels, even without revisiting 2008. For instance, has regulation protected Americans pension holders who invested in Uber, a company whose stock requires a global accounting firm to truly evaluate or get a sense of when it will be tradable? Or has it secured the stability of the public who invested in Snap’s offering, with its astronomical valuation that generated sizable profits for Wall Street bankers alongside losses for the general investor population? Regulation has certainly not been fulfilling its moral obligations, and it’s no surprise. Funds tend to pass through so many intermediaries and change form so many times along the way, that ultimately the only ones sure to profit are the bankers and investment managers, who were smart and privy to timely information, along with the well-endowed financial institutions who got in early and on favorable terms. Founders also get to enjoy the fruits of their labor, of course. And that’s all well and good, but one would expect that under normal circumstances those who put up the money in the first place would also be the first to see a return. And this tends to happen far less often than the regulators ever expected.

And until recently, this seemed to be an inevitable fate, but then along came the blockchain and changed all the rules.

ICOs have a few inherent structural advantages. (1) The vast majority of them are entirely transparent – anyone can know at any time how much the company is raising and has already raised, on what terms, over what investor distribution, and more. The information is openly available on the fundraising platform and tracking it isn’t overly complicated. (2) These investments allow for instant liquidation via trade in the issued tokens, so investors can make a modest profit or minimize loss quickly and easily. (3) Participation is open to anyone and everyone, irrespective of race, religion, nationality, or more importantly, position in a venture capital firm or investment bank. (4) Transactions take place between investor and investee directly, without a string of intermediaries taking their cuts and fees along the way. These advantages can’t be dismissed. In fact, we can be fairly certain that anyone trying to put up a wall against the token mechanism will duly find themselves on the wrong side of that wall – the one with the white walking dragon.

Cryptocurrency markets are tumultuous and will remain so for a while. What they lack is a technological solution, a mechanism that organizes, rates, and disseminates information – the only real regulator needed in a truly sophisticated, distributed market. Not only are these markets volatile, as new markets tend to be, but also the most crucial concern – that of how to use them to buy a car, a house, a vacation, or food at the supermarket – has yet to find a satisfactory answer. But this will all be sorted out in time. Knowledge will be distributed, competition will level the playing field, exchange rates will stabilize, retail chains will start accepting cryptocurrency payments, and the necessary mechanisms will emerge. $165 billion in cryptocurrencies in the hands of millions is one thing; $5 trillion in the hands of tens of millions of people is entirely another. And it will happen sooner rather than later; the evolution of this industry is already dizzying.

Three major forces are heavily disrupted by cryptocurrency markets, namely banks, stock exchanges, and private investment firms. Venture capital firms still steer away from these new markets, but their impact is nevertheless becoming increasingly clear and unavoidable. Blockchain technology is as vital to banking as it is to hedging and trading. For exchanges, these markets present a huge opportunity to expand and implement their vast accumulated knowledge, experience, financial acumen, and technology. Large investment banks also cannot fail to see the world of opportunities in possible new financial instruments for their clients. What will undoubtedly undergo transformation is the traditional investment model because it is difficult to explain why it is better to invest in untradable stocks that will perhaps mature in seven years, seven years in which the stock is managed expensively and non-transparently. Cryptocurrency investment funds are already being established, and as the space matures, one should expect an eventual contraction of the traditional approach.

This ultimately is the main reason why the financial press has been issuing warnings about the bubble bursting, the end of the party, the anticipated downfall. It issued no such warnings when unicorns with zero revenues were popping up left and right. Similarly, it tends to be cautious in its treatment of capital and real-estate markets, both of which have been bullishly charging forward for years. In reality, most of the financial press is at present, fed by those who are most threatened by cryptocurrency markets. This is fine and natural, but it too will change. In the meantime, if you find yourself curious or interested, you would best be advised to learn and think for yourself.

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