After investing in Bitcoin, Ethereum and other more established and well know platform coins and observe their phenomenal rise over the last 12 months, I was ready to find the new hot token to hit the market. Obviously, the ICO market was the place to go. I set up my etherwallet and nano ledger, learned how to send and receive funds for the ICO, and start looking for opportunities to invest.
I came across a number of companies that had phenomenal ideas. Ideas I thought could be as revolutionary as many of the top internet companies we have today. However, there is where my new found love for private companies ICO's came to an abrupt end:
Note I am not talking about Ethereum, Cardano, IOTA, Bitcoin and the blockchain platforms that do not have an "owner" but derive their value from the value of the token itself, but I am talking about private companies that have "tokenized" their business.
- When you buy the tokens on these companies, you are not buying a stake in the company itself and in many cases I am not exactly sure what are you buying:
This may seem obvious to many of you, but as I joined the telegram chat and the communities for the companies behind these ICO's I was amazed by the number of folks that were assuming that they were buying a stake in the company and would benefit directly from the company financial performance. One company for example had an amazing business model and a brilliant white paper. But when you look at the value of the token and the disclaimers tied to the sale, you quickly realize you may be funding someone else's dreams. Here is a disclaimer example of a company trying to raise $50,000,000 thru an ICO:
" Ownership of the token carries no rights, whether express or implied, other than a limited potential
future right or expectation to use and interact with the Platform as may be made available from time to time...if and to the extent the is successfully developed and deployed. Any potential future right or expectation relating to the provision and receipt of services on the Platform shall be subject to any restrictions and limitations set out in these T&Cs and/or the Platform Terms (as applicable). You acknowledge and accept that the token do not represent or constitute:
a. any ownership right or stake, share, equity, security, commodity, bond, debt instrument
or any other financial instrument or investment carrying equivalent rights;
b. any right to receive future revenues, shares or any other form of participation or
governance right from, in or relating to Company, and/or Platform ;
c. any form of money or legal tender in any jurisdiction, nor do they constitute any
representation of money (including electronic money); or
d. the provision of any goods and/or services as at the date that these T&Cs form a binding agreement between the Parties. "
Wow,! First of all, how many people sending $100 to $500 dollars to those ICO's do you think are really reading the disclaimers and understanding their investment rather than being enamored by the ideas behind the company? just read those disclaimers and think to yourself. Ok, then what are they giving us in exchange for $50,000,000 in funding? I was perplexed by the lack of information on the value of the token itself and continue to look for a silver lining to be able to base my investment on.
The only thing I could find was "rating agencies" notes saying that they expected the token price to raise based on increase demand for the token as the platform becomes more successful and attract more users. While this is true for any asset class, this alone does not justify the initial valuation for any ICO, and if the initial valuation is too high, the market will bring it down to the equilibrium price so new buyers would come in to the market and adjust the demand and supply balance.
Unlike Bitcoin and Ethereum and other platforms that the token is the primary source of value, for many of these private companies, the tokens are not truly necessary to conduct their business and they are just "tokenizinng" their business in order to raise capital. Because the ICO market is not regulated at this point, these companies can raise money without providing investors with the information they need to make a data driven informed decision on their investment. Basically, you're just taking their word for it that you are making a good investment.
Since many of these companies are just a white paper when they go thru the ICO process, you have no history and no idea to validate if their growth estimates are even plausible ( if they give you any growth estimates expectation or any other metrics at all) .
That being the case, just like a venture capitalist I wanted to know how I was going to benefit from this investment. Note, that I am not asking for assurances that my investment will grow, investing in any company carry risks and is up to each one of us to do our due diligence. I understand that. I am just asking for the information so I can actually perform the due diligence and access if, in my opinion, buying the company token is a good investment or not. Otherwise, I am just giving the owners of these companies free money to fund their dreams.
- Even when the companies do provide you with information about how ownership of the token will benefit you financially ( I.e. they will use a portion of the platform profits to buy back and burn tokens, they will pay dividends on the toke, etc), the price of the token on the IPO can be the well in excess of the discounted cash future cash flow (value) of the token, even assuming their growth estimates and platform usability are correct. This is counter intuitive in many levels. Since many of these companies are at the white paper stage or barely in business , or are entering a venture that will be fill with competitors, the risk at that stage are very high. And as any investor knows, higher risks demand for a higher reward. This is not the case here, and in my view the primary reason for these ICO's. These companies would have to pay a much higher premium to raise capital if they went to a lender, a venture capitalist, a private equity or any source of funds that operate in a regulated market. It's like taking candy from a baby.
I recently came across a particular ICO that dive provide some metrics regarding the valuation of the token and my estimated for the value of the token were about one forth of the ICO price. I am not claiming to be a financial wizard, which I am not, but I expected to be in the ball park and not 75% off. No thank you! On an IPO situation, you know what multiple you are paying for the expected earnings, can compare to companies in the same industries, look at historical data, receive a investor's kit, etc. On the ICO market, not so much.
Now, many of these ICO's might go on without a hitch, the token would initially go up in price and any one betting against it would get burned. As John Maynar Keynes once wrote: "The market can remain irrational longer than you can remain solvent". But that would because people are buying and selling not based on the underline values of the asset they are buying, but purely based on the expectation that prices will continue to go up indefinitely. once people realize what they are buying the bubble bursts and the last person holding the bag loses.
Also, while I am generalizing here, there are true opportunities out there and each one need to be evaluated carefully. My two cent's however is that the ICO market is in a bubble territory worst than the internet bubble of the 1990's and will only going to grow. With many people investing without understanding what they are investing in and with no regulations to stop it I don't see the bubble popping any time soon. but with time, If some of these ICO's don't come thru as promised, or don't launch at all, the bubble will pop and will bring down the whole blockchain sector with it.
When that time come it would be a great buy opportunity to invest in platform coin and the true winners in the space.
My hope is that regulation will come to the ICO market sooner rather than later and we can avoid major problems. I am all for making a profit, but not of the expense of many people losing their life savings.
Just one guys's view f the ICO market. Off course I can be wrong and miss out big time :) Let me know what you think. If you disagree let me know why. I am always eager to learn!