I recognize the demand for new funding and investment mechanisms, and I’m quite excited about cryptocurrencies in general. That said, the initial coin offering (ICO), in the current form, is a terrible investment model that cannot work and will make more people bankrupts than millionaires.
What is the ICO in the first place? After studying a bunch of the most famous examples — it’s easy to conclude that a successful ICO is an idea with enormous funding gathered in the process of selling a token with usually under-defined utility. The last point is crucial because it makes the relation between project success and its token value very unclear.
If you’re familiar with how startup investing works, then you probably know, that experienced investors do not invest in ideas. What interests them are the team, product, and traction.
Team — if you’re a serial entrepreneur with a track record of success, and you already have a good team, you may get an investment even if there are doubts about your product and there is no traction yet.
Product — you have a working beta or at least a promising prototype doing things that nobody else does. You may get investors money.
Traction — the holy grail — you’re nobody, and your product looks weird and crappy, but the user base grows like a crazy. You will get funded.
It’s important to understand that even if you have all three, VC money will not come in advance. You’ll get it gradually while being closely watched how you spend it and what is your actual progress. At the seed stage — where all ICOs are — you’ll get just enough funds to survive and prove that you deserve a round A. It’s done that way because even having a team, a product, and some traction, you may still not succeed and most startups don’t. Business is brutal, and innovation is hard. And I almost forgot — it’s not free — in return, investors want some shares in the company.
Here the ICO model appears, and you get all the money upfront having just an idea, a website, a team without any previous successes and a token smart contract that you can create from a free template.
With all the money and no legal obligations to investors, the team has no incentives to accomplish anything. If this is not enough — the token makes it hard to pivot and dramatically narrows the market.
Besides that, the whole model is entirely unproven. The only token-based project in the space that offers some non-speculative utility so far is the Ethereum itself that became a platform to run ICOs, what at least at the moment sounds a lot like a perpetual motion.
If it’s so wrong and evident, where does the money come from? Who invests in those projects? The bitter answer is people with no knowledge about investing, to some degree financially excluded, with no easy access to traditional markets — largely: teenagers. Those people will finance this next bubble in a similar way that small retail investors did it during the dot-com bubble in 2001.
This coming event is inevitable. Will it have at least some educational value? It’s hard to say. It seems like there is, and always has been, a market for bad investments and this one is significantly harder to regulate. What I don’t believe in is an opportunity for any of those mainstream ICOs to become the next big thing.