The road has been rough, but the crypto dominos are falling
Since the Ethereum ICO in 2015, we have experienced an unprecedented ‘ICO wave.’ According to CoinDesk, $256M was raised via ICOs in 2016, $5.5B raised in 2017, and an incredible $7B raised in the first five months of 2018. And the 2018 number doesn’t even include the EOS ICO which generated $4B in new capital for their project. According to Hedge Fund Alert there were already over 130 ‘crypto hedge funds’ up and investing by the end 2017. Based upon this math alone, it is clear that the emerging virtual currency fundraising approach is significantly challenging the traditional VC business.
The bottom line is the Ethereum ICO executed the ultimate crowdfunding fantasy that fledgling entrepreneurial companies like AngelList (which smartly launched CoinList in 2017) have been trying to achieve for over a decade now. The blockchain based, smart contract driven model has become a successful crowdfunding platform because it has made it easy for global investors to buy small, fractionalized tokens, and offers liquidity options almost immediately, independent of a traditional ‘liquidity event’. Historically, the average ‘angel’ investment has taken, on average, over 7 years before it achieves any form of liquidity through an IPO or by being bought for a premium — and that is assuming the angel investor hasn’t been ‘washed-out’ at that point, as is often the case. For all these reasons, ICOs have become an overnight phenomenon.
There are some very encouraging traditional industry affirmations regarding the cryptocurrency model and the blockchain technology that makes it possible. Nasdaq boss Adena Friedman, for example, is optimistic that blockchain will play a key role in the economy. Ms. Friedman says ‘Blockchain takes a lot of risk out of the system where banks don’t have to be as capital intensive — and that’s a big incentive.’ She also believes that digital currencies will continue to persist. ‘It’s just a matter of how long it will take for that space to mature,’ Friedman said. In the meantime, Nasdaq is supporting existing crypto exchanges. In April, Nasdaq inked a deal with Gemini Trust, an exchange founded by Mark Zuckerberg nemeses and early bitcoin investors, Tyler and Cameron Winklevoss. Gemini will use Nasdaq’s technology to ensure trading activity is in compliance. Goldman-backed Circle also recently acquired crypto exchange Poloniex.
Meanwhile, the foundation so security tokens can traded and remain security compliant is steadily being built one brick at a time. Projects like Bancor, Polymath, tZERO, OpenFinance Network, Start Engine, and Templum, are all building standardized, interoperable, and scalable security token platforms. We predict that Nasdaq and other established exchanges will continue to work closely with crypto exchanges and even acquire many along the way as the sector inevitably consolidates.
Wall Street’s appreciation for the blockchain is building. The venerable financial powerhouse, Goldman Sachs, recently hired a quant trader to start their cryptocurrency market unit, and developed an online campaign that links to a blockchain tutorial on their main website. The exodus of younger bankers who have seen the crypto light is starting to build momentum. Recently, rising stars from Goldman and Credit Suisse have jumped their mother ships to start their own crypto funds.
There is also a growing belief that asset based coins will ultimately replace small cap stocks at a minimum, if not all stocks. Today, less than 1 billion of the worlds 7.6 billion people have any digital access to currency. By embracing crypto, the financial world could open the door to these billions through wider mobile access, selling fractionalized stock shares and ownership stakes in other assets like real estate, music and film, airplanes and sports teams, and establishing blockchain-based micro lending programs to help finance their investments.
The most significant challenge to this paradigm shift is the looming eye of Big Government. While legitimate crypto entrepreneurs and investors have been able to successfully run one step ahead of new regulations, it’s not a comfortable feeling. Most of the crypto entrepreneurs we meet would prefer to know what the rules are sooner than later, so they can have confidence their project won’t be derailed by some new regulation out of left field.
Slowly but surely, the SEC’s opinions on bitcoin, ether, and ICOs arebecoming more clear. The SEC’s point man William Hinman spoke recently at a San Francisco conference and provided further clarification on whether cryptocurrencies and ICOs were securities. ‘Central to determining whether a token is a security is how it is being sold and the reasonable expectations of purchasers,’ Hinman says. Hinman acknowledged that some digital assets could be structured more like a consumer offering than a security. He seemed to imply that memberships and subscription service-based coins were more likely not to be determined securities. Hinman concluded his remarks by saying, ‘We stand prepared to provide more formal interpretive or no-action guidance about the proper characterization of a digital asset in a proposed use.’ Translation: ‘Stay tuned — we are still trying to figure this all out.’
Beyond having to navigate uncertain regulatory waters, and ultimately determining what coins are securities and which ones are consumer offerings with ‘utility’ value, there are dozens of other big picture issues facing crypto entrepreneurs and investors. What is the optimum token creation and distribution strategy? What are non-asset based coins really worth? What is bitcoin really worth and why? Is the long-term value of an ICO tied at all to the price of bitcoin? What determines a coin’s value over time? How should investors value an ICO? How do investors identify winning crypto companies? How long should pre-ICO and ICO investors hold their coins in such an immature and volatile market? What is the ICO market going to look like in 1 year? 5 years? 10 years?
This diary is, in part, dedicated to helping put into perspective these and other major isssues facing the long term devlopment of the cryto markets.
Dear SEC, think before you jump and don’t let us down….