ICO’s (Initial Coin Offerings – think: crowdfunding for cryptobusinesses on steroids) are occuring more often and at even larger scale. While it’s super exciting, there are some huge fundamental issues with the way this is going down. I’m shocked by the extreme speculation and lack of diligence. We will see the musical chairs stop sometime this year and it will get ugly.
1. Seed-stage businesses are raising series C-sized ICO's
The current array of ICO's are raising $30+ million dollars. This is traditionally reserved for tech companies that have large, fast growing businesses with proven products and customers. Generally a Series C round. Most ICO's are based off a whitepaper and maybe a prototype that lets consumers get a feel for what the product can be. Companies in that phase maybe raise a few million dollars from angels or VC's after going through weeks of due diligence. This highlights how speculative today's ICO investors are.
2. There's almost no regulation or standardization compared to IPO's
IPO's have a lengthy form called an S-1 that details all of their strategy, management team, shareholders, financial statements and more. ICO's have no such requirement but are raising tens of millions of dollars. Investors have little means of doing diligence beyond reading the whitepapers.
3. The Ethereum network can't handle it
Ethereum grinds to a halt each time an ICO happens. This happened yesterday with the Status ICO and again today with the Civic ICO. If these companies really valued this process and were not trying to simply strike while the iron is hot, they would figure out more sustainable means for selling tokens.
4. Fundamental valuation is almost impossible
ICO's are effectively selling pre-paid credit. It's like buying a Starbucks gift card before anyone drank coffee. How do you value such a thing? One way is to look at substitute goods e.g. tea in the Starbucks example, and estimate how much more utility or cost savings are achieved. But there's no way to do a discounted cash flow analysis or find any meaning comps.
5. ICO buyers are speculators, not token consumers
What we are seeing are scalpers lining up to buy concert tickets. Only to sell them to actual fans who weren't aware of the concert when tickets went on sale. If you look at BAT, ownership is ridiculously concentrated. 5 buyers got half the supply. I'd bet Ether that no meaningful advertisers (who are the target market for owning BAT) are part of this group. If BAT truly becomes useful, advertisers will have to find their way to buy BAT from these speculators off exchanges.
Given all of this, there is still excessive demand from capital for ICO's. Whether it's FOMO or diversifying BTC and ETH gains into other coins to avoid triggering a tax event, this trend will continue for some time. But I predict it will inflect later this year.
We will see this first wave of ICO's crash and burn, just like we did in 2000. A few will survive. Cryptocapital markets will adjust their standards. Then we will see some regulation whether from the SEC or something else. A new, more robust and proven class of ICO's will emege, perhaps from established business that want to tokenize their services.