The BitMEX research report
Just recently, there was a report released by BitMEX research which sort to track funds raised from ICO’s. In short, the report uses blockchain data to identify wallet address of companies, and then traces the movements of funds. Overall, the report is heavily critical of ICO’s. Here is a direct quote from its conclusion;
Based on our methodology, it appears as if ICO teams have profited by almost US$13 billion from this ICO process. In our view, this money was made incredibly easily, with very little work, accountability or transparency
No doubt the report shows some fairly obvious statistics. But here is where I think it needs some dissecting, and some different perspective.
Are ICOs printing money?
Since the BitMEX report has been released, the accusation of ICOs printing money has been circulating widely. What do they actually mean by saying this? After an ICO, the token is listed on exchanges, providing instant liquidity to investors. The token then gets a valuation based on the free market. Because the ICO issuing the token kept a percentage of the coins, they have both the funds invested, and the net worth of the coins they hold.
So whats the big deal here? Why is this circulating and the barbs have come out for ICO projects? This is a struggle for me to understand as an ICO investor that has read dozens and dozens of white papers. Just about every whitepaper I have ever read clearly defined the token distribution. I knew exactly how much would be kept by the company, and how much was being sold to the public.
When I came across projects that had low public sale proportions, I didn’t invest. Why? Because there was a risk of liquidation of these coins in the future, which would adversely effect the total supply. Personally, I feel like this was a basic tenant in the ICO investment space, as I have written about before.
ICOs are evil for selling coins!
Another gripe I have with this report, is it seems to imply that there is an issue with projects selling coins. I get the argument, they raised funds in Ethereum or Bitcoin, and also kept coins for themselves. But so what? It clearly stated in just about every whitepaper I read that funds were to be used for marketing, operations, and funding the company?
Were some ICOs greedy for keeping too many coins for themselves? Yes, absolutely. Did some ICOs raise too much money to begin with? No doubt. Are they all evil? No, they are not. For the most part, the majority of projects are run by well intending entrepreneurs, trying to figure out and build very new technology in a very uncertain and volatile environment.
Quite simply, projects that have not been diligent with their treasuries will destroy their own coin price. This will have a negative network effect on the project, eroding public perception and in turn, effectively axing the net-worth of their treasury.
Have we forgotten token lockup periods?
Legitimate projects implemented lock-up periods on their founders allocations after the ICO. Why do this? Well firstly to stop the coins being liquidated on day one, but secondly, to incentivise the founders with the long term vision of the projects. This became a strong trend amongst many projects as the ICO scene exploded in late 2017. Reason being, it was quickly identified there needed to be measures in place to stop exit scams. Its a brilliant feature of smart contract technology, and I believe its working!
According to a report by ICOrating.com, over 50% of projects implemented lockup periods in Q1, 2018. These periods ranged from 1-3 months, up to 18-24 months.
So again, according to the data, we had a majority of crypto-companies implementing token lock-ups. I would have liked to have seen a low percentage in the 1-3 month range, but this chart is from a year ago.
Whats the difference to a company going public?
In the more ‘traditional’ world that poor mortals of ye old world live in, companies go public in an IPO. Stock valuation is given by an underwriter, and then sold to accredited investors and institutions. Based on the value the underwriter prescribes, and the interest in the IPO, effects how much money the company makes.
After the IPO, the stock is listed on secondary markets where supply & demand finds a price. In many cases with large and promising tech companies, the stock price can explode. Founders, early employees, private investors, and venture capital can see huge returns on their initial investments.
Entering the world as a start-up, most early stage companies get private seed funding. Getting the most juicy discounts are obtained at this stage, in addition to class-A shares (the best kind). Further, these only go to Venture Capital, Angel Investors and company founders/early employees. The public only get an option to get the stock when its on secondary markets, and these are ‘common stocks’. No juicy discount for you, sorry.
So traditional companies raise money, build the company for a few years, then go IPO. Some even issue more shares to raise addition capital, which is called dilution. Are they printing money? If we apply the same logic given to ICOs printing money, then yes. Jeff Bezos, the Founder of Amazon, has 78 million worth of his own companies shares. Value of these shares now? $132.2 billion. Has he printed himself a fortune? Kinda, but hes worked his ass off for it too.
The democratization of crowdfunding
The initial coin offering ushered in a new wave of crowdfunding. One where the everyday person got the opportunity for those juicy discounts, and to participate in a new digital economy. Not just this, but due to blockchains incredible capabilities, we got liquidity on exchanges within mere weeks of ICO completion. Investing into ICO’s is high risk, it always has been. But its created a massive network effect of this new internet money that we are all still trying to figure it out.
Unfortunately, regulatory pressure has forced ICOs into obscurity and back into the hands of high net worth individuals and VC funds. Increasingly, it will become more difficult for the everyday person to get the good opportunities, unless, regulations come in our favor.
Either way, its important to realize this is a new and evolving industry. There will be hurdles. Mistakes have, and will, continue to be made. Some ICOs have printed money, exit scammed and run. But guess what, they will either be caught, or have their credibility eroded. Most projects are conducting business as per the whitepaper – that SHOULD – have been read by anyone that put money into the project.
P.S If you liked this blog, you might like these others that I have written.
- Is a Bitcoin world reserve currency really possible?
- How the value of bitcoin is determined
- The future of Bitcoin is Satellites, Sidechains and Smart Contracts
Beau is the Founder & Chief Editor at Cryptocurrency Australia Media, an educational platform designed to help anyone learn about cryptocurrency investment and blockchain technology. Beau is also the Founder & Principal Consultant of Blockchain Management Solutions, a specialist technical and project management consultancy, is an advisor with Masternode Ventures, a blockchain incubator, and is an advisor with THORChain, a new decentralized exchange protocol.