To ICO or not to ICO
I was overwhelmed with projects pitching me to fund their ICO as an angel investor, and decided to analyze the market 2 months ago. In short, the technologies of 1993 have met with the hype of 1999. I do believe in cryptocurrencies, but I’m a bit cautious about ICOs. However, there are good ICO investment strategies as well.
CRYPTOCURRENCIES
1. Cryptocurrencies are here to stay, they serve as the store of value. It is not a bubble, but a part of the global economy.
2. In May 2017 there were only 12 mln cryptocurrency wallets (it is a laughably small amount). There will be at least 300–400 mln wallets worldwide. As every new investor brings money and buys currency (while the supply is limited), it is the first fundamental growth factor.
3. The growth of daily trading volumes and the currency rate growth in January 2017 was due to the fact that first professional players (hedge funds) had come and each of them had brought 50–100 mln dollars to play with. 10–50 times more institutional investors will enter the market, and it is the second growth factor.
4. In March 2017 Japan legalized Bitcoin, and the daily trading in yen reached 47%. In June 2017 India did the same. Other countries will follow like dominoes, and it is the third growth factor.
5. The ecosystem is half-closed, and it is the fourth factor. Withdrawal to fiat (paper money) is possible, but usually, if an investor has earned 10X on mining in a year, and an average 8X return on one ICO in 2 months (calculated as 50% discount at pre-ICO and historical fourfold growth after public offering), he won’t withdraw funds.
6. As a consequence of these factors, the volume of cryptocurrencies’ in circulation will grow from today’s $80 billion to $1–10+ trillion.
7. Ethereum is catching up with Bitcoin and will leave it behind. The major driver is that most ICOs use it.
8. It is possible (and very likely) that 2–3 new cryptocurrencies will emerge and enter the top 5.
9. The daily volatility up to 30% is normal. Cryptocurrency markets are sometimes manipulated (though it is getting more difficult for the leading currencies), token price is often manipulated (see July’s cover story in Forbes US about Gnosis and its market capitalization being pumped to $3 billion). Read as: a private investor can make long-term investments, but should by all means avoid short-term intraday trading.
10. There are few professional traders, the spreads can be seen with a naked eye, but this market inefficiency slash opportunity to make money will quickly disappear.
11. The people who earned 8–10X mostly due to the natural market growth in the first half of 2017 contribute this success to their own investment genius. The illusion of infallibility leads to a known end. Namely to ICOs.
ICO
12. Combining pre-IPO valuations with pre-seed stage is an interesting concept. “Let’s start a company with a public offering!”
13. Most of this autumn’s ICOs won’t manage to raise enough funds.
14. Project founders have inflated expectations. Everyone wants to become Tezos ($230+ mln) and Bancor ($153+ mln), but I have analyzed data on 50 major token sales and found out that only 5 projects have attracted 49% of all funds, and 10 projects have attracted 61%.
The average round for a project in 1–5 positions comprised $125 mln, $33 mln for 6–10 positions, $13 mln for 11–48 positions (not much already, and the average round will fall dramatically).
15. The number of ICO projects is growing much faster than the volume of new money in the market. Bear with me. 20 companies per week is about to change to 200 per week (which over 3 months gives roughly 2000 companies). Each of them wants to raise at least $10 mln which gives us a target of $20 billion. So far the ICOs have raised $1.2 billion, the 15X growth does not seem realistic.
16. The worst factor. This is a highly speculative market, but everyone thinks that he/she is not “the last idiot”.
17. The best factor. The industry is seeing huge influx of talent and capital. Hundreds of entrepreneurs, coders, investors I know have joined it.
Gordon Gekko was right — “Greed is good”.
18. After market correction (put mildly) only the strongest players will survive.
They will join the major league of tech companies like Google, Uber, etc.
19. I retract my prediction that we will see a $1 billion ICO. We won’t. But 5–10 companies of this autumn will surpass $1 bln capitalization after crypto exchange listing.
20. Here is the first working strategy: pool your capital and invest in the best projects at the pre-ICO stage with a discount. Keep in mind that there will be a 2 months lag before public offering of the token. Ask yourself constantly: “Am I the last idiot?”
21. The second one would have worked 3 months ago — to launch your own project. If you haven’t done it yet, forget it.
22. The third one. To invest in projects, which you would have invested anyway according to classic venture rules — projects with a prototype, earnings, traction, and an assembled team (such projects are rare now :)
23. Still, quality infrastructure projects do exist. And their tokens show the 26X rate growth after listing at crypto exchanges.
24. I support some of the 3rd type projects as an investor (e.g. TokenStars). They would do quite as well without an ICO. That is, ICO is just a fundraising tool. Just what it should be.
OTHER
25. The technologies of 1993 have met with the hype of 1999. Many tech barriers exist yet, but the concentration of brains (and now the concentration of capital, as well) makes me believe that the community will solve everything.
26. Crypto-anarchists have some mind-blowing ideas. I like “LLC in the cloud” — a legal entity beyond any jurisdiction, beyond taxes and laws. It is nowhere and everywhere at the same time.
27. Special thanks to Victor Lysenko (Groupon, RocketBank, Acronis) for introducing me to the brave new world in May.
