My Voyage into ICOs…Not So Fast
Cryptocurrencies and Initial Coin Offerings (ICOs) are blowing up right now. You’ve surely seen the headlines: Bitcoin is up 630% YoY, and Ethereum is up 2,803% YoY. That certainly beats the 11.8% that SPY returned in 2016, which is even high itself when measured against the 8% average annual market return over history. Surely you’re thinking “bubble”, or “dot-com bust”, or maybe even “I want in”. But regardless of what you think, the market is hot. As of the beginning of August ‘17, ICOs have raised more than $1.3 billion YTD from investors, compared to the $295 million ICOs raised during the 2 years between 2014 and 2016. Investor appetite for these cryptocurrencies is voracious, and I decided to set aside some speculative capital to make an investment myself.
First of all, what is an ICO? First, let’s do a quick review of an Initial Public Offering (IPO). An IPO is a fund raising mechanism where a company sells investors shares of the company, and in return the company receives capital (think $USD). The company then uses that money it recieves to invest in its business, hopefully driving the value of it business up, and thus the shares the investor purchased up. An ICO is very similar. A company sells you its underlying cryptocurrency in exchance for a different, more liquid cryptocurrency like Bitcoin or Ethereum, which it then uses for investment or business initiatives. For example, imaginary company Avian Energy would have an ICO for its AvianCoin with the goal of raising $10mm from investors. Avian Energy plans to use the money it raises from selling AvianCoin to fund its proprietary technology that captures the energy that birds generate from flapping their wings, with the goal of creating a decentralized worldwide power grid. Down the line, you can use the AvianCoin to buy the energy! If you are an ICO investor in AvianCone, maybe the 1 AvianCoin you bought initially is then worth 10! But more likely, you would want to sell your AvianCoin 1 week after purchasing it for 10x what you bought it for after the world realizes how great of an investment it is. If that example sounded ridiculous to you, search DogeCoin on Google. Exactly.
An IPO and an ICO sound very similar from this basic description, but there is one very stark difference. Investing in an ICO and buying cryptocurrency does not confer ownership of anything like buying a share of a company does. My ownership of 50% of all AvianCoins only allows me to use them on the Avian Energy platform. In contrast, if I own 50% of Tesla stock, I would own half of the company and have major power over the direction of the company. The vast majority of ICO investors investing speculatively, hoping that successful projects or simply excitement over the ICO will drive demand and the price of the cryptocurrency up, which they can then sell and potentially drive massive returns. It is a high risk and high reward gamble, as ICOs are currently unregulated (though that might change soon), and there have been many scams that have left investors with nothing. Buyer beware.
After all of the buzz over ICOs, I decided to allocate a portion of my speculative investment portfolio to cryptocurrency and started researching what my first investment would be.
The first thing I realized is that there are A LOT of existing cryptocurrencies and upcoming ICOs. There are over 900 that actively trade according to Wikipedia. These cryptocurrencies back everything from decentralized domain name hosting (Namecoin), decentralized mobile messaging (Status) to Internet Memes (Dogecoin). In order to buy any existing cryptocurrency, or participate in an ICO, you need Bitcoin (BTC) or Ethereum (ETH). BTC and ETH have become the defacto liquid cryptocurrency base, meaning that you likely need to own one of those cryptocurrencies if you want to buy a different one. I’d recommend using Coinbase to make your initial purchase of Bitcoin (BTC), Ethereum (ETH), or Litecoin (LTC).
There are a few websites I came across that list upcoming ICO calendars, like TokenMarket, CoinTelegraph, CoinSchedule, and CoinStaker. I was taken aback by the sheer number of upcoming cryptocurrency ICOs, and the bizarre, somewhat unbelievable descriptions of each. “Decentralized social travel”, “decentralized search engine”, “cryptization of illiquid assets”. I saw a lot of non-sense; a lot of companies trying to get in on the cryptocurrency rage and raise a quick buck. The data was easy to come by, but hard to parse. I found CoinStaker to be the best option, as its UI was solid and it promised a higher quality list of ICOs (tbd!).
I dug deeper and narrowed down my list of ICOs. A few factors I used:
- ICO company focus on the financial markets, or cryptocurrency exchanges. The financial markets are way I believe decentralization will effect the first, so I looked for companies trying to be disruptive in that realm.
- Solid leadership team — quick LinkedIn searches to make sure these founders were legit. A lot did not seem so, with suspect backgrounds or no technical experience.
- Whitepapers — all of these companies submit papers reviewing their product and the market they are trying to serve/disrupt. It’s important to read through these to get a better sense of the company. It’s also an easy quality check — anything riddled with spelling or grammatical errors I quickly threw out.
- News — quick Google searches to see if any publications had picked up on the ICO. Some had many, some none.
After a few days of research, I came up blank. I was not confident in any of the live or upcoming ICOs that I narrowed down to be any sort of reasonable speculative investment (as funny as that sounds). I wasn’t finding the next Bitcoin on my own, it would be a needle in a hay stack, and probably a loss of my money.
I next took a different approach. I looked for help. I Googled upcoming ICOs and looked for articles describing a few that looked much more legit and promising that some of the ones I stumbled over. I have a few in mind that I plan to do more research on, and if they check out potentially invest in a few weeks when the ICO opens. To be continued…
