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Blockchain and ICO investments today.
ICO market being a bubble is no secret: it is an obvious fact. ICO, blockchain and cryptocurrencies are discussed in media, hundreds of whatsapp groups and telegram channels, by taxi drivers and wall-street banks executives (hello Jamie Dimon), promoted by show business and sport stars.
ICO is essentially a dramatic fight for “easy” money. In August 2017, the most expensive boxing match in history called “The Money Fight” took place, but the real money fight of 2017 is ICO market.
The Money Fight’ Floyd Mayweather actually understands it and actively participates in ICO promotions, just like other show business stars (i.e. Paris Hilton) do.
Economic bubbles have both pros and cons, it can be discussed for ages, but the main message is simple — during the bubble hundreds and thousands of companies are going to die, but several new players, who will change the world and create new economy, will be born. (relatively recent examples — Amazon, Google, Paypal etc.)
I am personally an eager advocate for blockchain popularization, development and implementation, including ICO-financing market growth. At the same time, I try to be realistic about this technology revolution that bears great risks for investors. These risks are what I want to talk about today. Let’s start from some background info and basic numbers.
1. ICO shakes blockchain market — and this is a good thing.
Blockchain exists since 2008 (the moment of bitcoin’s birth) and is most actively discusses in the last 4–5 years not only in startup and venture fields, but on the level of corporations, banks, regulatory institutions and governments.
But was blockchain industry of 2012–2016 so big and successful that so much media noise and hype was created around it? Judging by the numbers, the answer is no.
Venture investments in blockchain make only minor 2% of the overall investments amount in worldwide fintech, and its growth rate in the last 3 years was only mild 20–30% per year. There were maximum 100 investment agreements per year, and only several dozens of them exceeded $1M.
2017 changed the game for blockchain startups: new fundraising mechanism called ICO (initial coin offering, other names — initial token offering, token sale, token swap, token generating event etc.) gave hundreds of startups opportunity to raise millions of dollars on blockchain. Industry’s growth rate per quarter is 300–500% and continues to grow.
ICO has changed the situation in blockchain market investments to its core: the number of traditional VC deals have declined, while ICO financing grows drastically and has already exceeded the VC industry by 5 times.
Does it mean that ICO is a bubble? Most certainly yes, because industry itself and its economic base hasn’t changed, and the artificial money pumping obviously leads to excess of finances and the following problems. But the bubble is still beneficial for the entire blockchain economy:
- It attracts attention of talented entrepreneurs and new ideas
- Banks and corporations’ attention leads to understanding that blockchain revolution is unavoidable and it’s better to implement new technologies rather than deny it and stop development.
- Attention of regulatory institutions and governments shows that they seriously consider both implementation of new technologies and new regulations, relaxing requirements etc.
Today we can already say that ICO is a rapidly developing separate industry with its own participants, goals and rules. There are technology startups, investors, consultants, lawyers, marketing and analytics specialist, which at some day will enable ICO industry to be well-balanced, self-regulated and stable:
2. ICO’s rapid growth causes big problems
But this “moment of stability” isn’t there yet. Nowadays ICO market is in the very beginning and like any young industry is affected by serious changes, manipulations and any other risks connected with rapid growth of a young organism. Considering that we speak of ICO as an investment instrument, its risk are mostly connected with financial losses for investors.
Perhaps it’s not worth discussing why every startup thinks about ICO: the obvious answer is it’s an easy, fast and quite effective way to raise funds to finance their project.
The question is why ICO attracts so many investors? The answer is similar: most ICO investors see it as an instrument for very fast and highly profitable investment. Because of speculative Pump and Dump strategies the market “swings”, tokens are “traded off” and lots of people think that 500–1000% of ROI in an economic norm (however, in reality not even Alibaba or Facebook had such growth rates at the beginning of their journey).
Millions of dollars are invested in just “an idea” rather than sustainable and visible business . It’s due to a fact that such startup doesn’t have any background, history nor products, and in fact no real results achieved. Traditional VC-backed startups to achieve the comparable fundraising amount had to demonstrate stable and working business with significant operational traction, state-of-the-art working product serving to thousands or millions of clients.
Additional specific risk in ICO investment
I would like to draw your attention to the fact that risks of tokenized economy are a lot higher than general venture (I.e. traditional fintech), and that’s why blockchain industry was underfinanced by VC funds:
- Technical risks: no unified standards and protocols, technology evolves everyday and seemingly evident decisions of today (i.e. erc20) can lose their relevance in the next years.
- Legal risks: today ICO isn’t properly regulated, token as an asset class isn’t defined everywhere, and this funding mechanism can always be banned by regulatory institutions (recent examples — China, South Korea, Taiwan).
- Economic risks: in most cases token is a product (utility token) that can be used in future in a platform or app. It’s really hard to evaluate today this product’s price in a future, and if we look at most ICO projects’ whitepapers, their tokens’ price doesn’t have any base from the point of view of future demand. Which means founders are simply guessing what their product will cost in the future.
We also shouldn’t forget about the risks connected with fraudsters’ interest to rapid growing markets with a lot of capital flowing.
According to Business Insider, 10% of ICO investments were stolen in 2017.
Psychological team risk.
I especially want to underline this key risk, which is to my opinion greatly underestimated. Entrepreneur should always be motivated, always “hungry” for results that will enable to him to take his business to the new level, attract new investments etc. If from the begging you have attracted enough capital for comfort functioning of your business for several years, will you still work long nights without weekends and personal life? I doubt it.
According to Peter Til, startup must be 10 times faster and 10 times more effective than established players, but excessive financing can quickly turn a startup into a traditional “well-fed” corporation.
3. “Startups don’t need venture funds anymore, ICO industry is going to kill all VCs”
A lot of people say that ICO is going to completely replace venture industry: it is way more effective than traditional investors.
My opinion is opposite: if professional investors don’t come to ICO market, industry can die in a matter of 6–12 months.
Why? Industry needs balance between the uncontrollable, “anarchic” development and rules of traditional industries. Today we already see great interest from big investors (investment banks, pension funds, corporations), who would like to invest in ICO market, but won’t do it until the industry won’t become mature.
Now already there is an obvious trend how professional investors like hedge funds, VCs & PEs are entering the ICO market. Most of them are quite new to fintech / blockchain industry, however there are also those with solid fintech expertise — Blockchain Capital, Pantera, BB Fund, Polychain.
How to invest in ICO today, when the bubble is growing?
I will describe the key blockchain investment principles of Based on Blockchain Fund (BB Fund), luanched by Life.SREDA VC. This is how we see ICO and token investments on the whole:
1. ICO is a bubble and we should play by its rules
Accept the fact that ICO is a bubble and keep it in mind when investing in it. Today nearly all investors follow the beginners’ strategy “Spray and Pray” — invest in random startups and hope that some of it will work. This strategy won’t work when the bubble is big (except the limited time frame), because a lot of startups are launched for the ICO fundraising itself, not to create successful and sustainable business.
2. Think ahead and long-term, don’t rely on speculative “pumping”
Today ICO is a Pump and Dump market, where market makers speculate and manipulate it for fast results (trade off tokens, show great growth and exit quickly). Inexperienced investor doesn’t stand a chance to beat such “market makers”. That’s why you should only rely on your investment strategy, market demand and potential, and long-term perspectives.
3. Use basic traditional investment mechanics for analysis and decision making
Today startups “tokenize” everything — blockchain becomes handy for casino, brewery and goldmining plant. It is true that blockchain can be used in almost any industry, but it is not a magic pill that will make any business idea successful. You still need strong team with professional experience, strong orientation on market demand and consumers’ pains and needs, solving specific economic problems. Scrolling the ICO’s website and reading its whitepaper is not enough to analyze these factors, you have to conduct a classic due intelligence and deep investment analysis to make a right decision.
4. Planning to invest in blockchain? Try using technology in your internal operations.
Most of market players invest in technology, but don’t use it in their own business, although it would help them understand the basic principles and benefits of technology. For instance, we at BB Fund have been developing our own crypto-investment platform for many months, which provides transparency for our investors, security and auditability.
5. Don’t play alone, invest with funds and partners
In order to reduce risks associated with investments, many large investors on the ICO market are pooled together to complement each other’s strengths and add value to portfolio companies. One of the latest examples on the market is the 0X protocol, which attracted investments only from profile investors during the ICO — Polychain Capital, Blockchain Capital, Pantera Capital, Jen Advisors, FBG.
6. Don’t avoid regulations, it is beneficial for every participant on the market and will sooner or later come to ICO space
Both startups and investors try to invent schemes to avoid government regulations, thinking that tokenized economy doesn’t need it. In reality, regulation is almost unavoidable, but it can exist in different forms — classically governmental (China will be probably the first to introduce it), technological (smart contract regulations) or even as a self-regulation mechanism (Vitalik Buterin mentioned this recently). In any case, regulations will come, and it is better to play by the rules from the start or create these rules.
Investor has to comply with regulations (in VC Fund case, should be registered and licensed by Central Bank) and provide legal compliant investment instrument for the market.
7. Don’t follow the market, create it. Become ICO Market Leaders and overcome FOMO
Today everyone tries to copy each other’s approach and strategy, following the same practice, making the same mistakes. If someone invests in ICO startup, everyone follows without thinking, illustrating the FOMO syndrome (Fear of missing out). Most powerful players (market leaders and influencers) will benefit from it, but followers —unlikely. The only wining strategy is to follow your vision, your own investment strategy and market understanding. Want to successfully play on the bubble market?
Don’t follow the ICO market, but create it by yourself.
Five years ago we were one of the first VC fund in the global FinTech industry. Today we are becoming one of the first professional compliant VC in the ICO and crypto space.
Want to know more about ICO market, blockchain, cryptocurrencies? Join us at BB Fund to create the future of ICO and blockchain industries together.