“What’s an ICO?” It’s in quotes because it’s a mom question. And when the mom questions start, it’s definitely time for a blog entry. What I mean by this is that once my mom starts wondering about it and actually paying attention, I have to figure a topic has reached critical mass. It happened earlier this year when I decided it was time to blog about bitcoin. Hasn’t taken long for that conversation to evolve into a discussion about ICO’s…why my mom is hearing about them, and how best to describe and opine…
I am a true believer in the use of blockchains to transform much of what we do every day when it comes to agreements, obligations, and payments. The securities and legal industries, to name only two of many, will be transformed in ways that will create new efficiencies not imagined until recently. Progress. Love progress. Embrace it, for resistance is futile. We know this. We don’t always like it, but it needs to be accepted by anyone not wanting to be left behind due to denial. So what about these new fund raisers called ICO’s? Is this progress?
An ICO is an Initial Coin Offering. Companies issue new cryptocurrency coins in exchange for established ones, generally ether of Ethereum fame. So we use one cryptocurrency to help a company create another? Why? Because the company is looking to raise capital. By taking in ether, they have raised a liquid asset and issued an illiquid one. And who is doing this? Companies involved in blockchain technology as a way to accomplish ‘something.’ And it is that ‘something’ that the investors are betting on. A new use of blockchains to solve a problem by a company that understands how to conquer that problem in a way no one else has…maybe.
This is where we come to the first issue I have with ICO’s. What are you actually buying? A well designed, heavily tested, oversubscribed technology that can be put into use tomorrow? Well, maybe…or maybe not. When I was first introduced to blockchains and bitcoin, I was told that it was a realm for “kids with code.” This was the description of the faces behind much of the innovation that was going on. Smart visionary developers that understood answers to problems most of us don’t even realize or acknowledge exist. Better mousetraps when the old ones seemed to be working fine. But business sense and experience? Not so much.
This was and is a problem. For me, it was an immediately apparent problem as I sought with a small group to buy ASIC based computers to mine bitcoin. There were a handful of companies that popped up around the same time promising the latest and greatest machines built for just that task. So we signed up. The company’s generally were low on capital and looking to create computers selling for five figures. So they set up pre-orders and took our money. And then they set about building these machines. And we waited…and waited…and waited.
Please understand, or remember if you’re better versed, bitcoins constantly get more difficult to generate and therefore constantly require more computing power. Or, it takes longer with the same computing power to mine a steady amount. So a three month delay in delivery was costly to us as ‘investors.’ And those behind the companies building these machines were not seasoned business professionals for the most part. Ownership scrambled to handle these delays. And generally any reaction was too little too late. So in that most American of exercises, they got sued. And most went out of business. I’m not sure if the founders all ended up losing the money they were able to pull out of the up-front payments and profits generated, but it definitely was not a possible scenario they planned for.
So now we have ICO’s. The latest and greatest way to fund your blockchain related startup. Proof of concept? Overrated…a simple white paper about how you’re going to change the world is really all you need. And some believers…or at least evangelists. And then you strike. Get all these dreamers to invest their crytpocoins in your new one. And the reason they do this is in the hope of investing for pennies in the next bitcoin. Or even Ethereum. Insane growth not available in more traditional market offerings. One of the recent ICO’s was for EOS. One of the things that’s interesting about this one is that the founders stated in writing that the EOS coins being bought had no real use in the EOS application itself. In other words, you really bought nothing of value. But you did help a handful of people raise a couple of hundred million dollars. The EOS coins ran up to over $4 and now “trade” just under $2…for really nothing.
This ICO thing begins to sound more and more like traditional investments…actually more traditional investment scams, schemes, or some other unflattering word. Pump and dump scenarios have been attacked by our regulators for years. And that raises another interesting trait of these ICO’s. Many of them are intentionally closed to US investors, and if the issuer notes that your IP address is US based, you can’t apply to participate. It could just be me, but if these things were so legitimate (“legit” being one of the more overused terms these days) I’m sure the smart people behind them would want to welcome US investors.
I’m sure that this new funding mechanism called an ICO can have some benefit. But it seems like a bigger time Kickstarter without the product at the end that you can hold and use. Don’t get me wrong. There are definitely people making money on these. But like the legal IPO’ s of the late nineties where favors were called in to get initial share allocations, all the way through pump and dumps and real Ponzi schemes, the ones getting rich aren’t the small investor taking a shot at instant profits or riches. No, as usual, those are the people that will most likely end up on the wrong side of the trade.