Initial coin offerings: a new alternative asset?
May 23 marked the seventh anniversary of the first time bitcoin was used to make a purchase. Laszlo Hanyecz, a US computer programmer, bought two pizzas with 10,000 units of the cryptocurrency.
Today those bitcoins would be worth over $27 million.
Bitcoin’s value has rocketed of late, buoyed by news in April that it had been approved as legal payment tender by Japan. The bitcoin price peaked at $3,019 on June 11 and stood at $2,350 as of yesterday—still well over double its $1,062 level at the end of March.
The digital currency might be in bubble territory, but its impact on financial markets is already profound. The blockchain digital ledger technology supporting bitcoin is being eyed as the future of payments and settlements in financial markets.
From bitcoin to ICO
Next up, bitcoin could help revolutionise or supersede the cumbersome process of initial public offerings with a new instrument: initial coin offerings.
An ICO is effectively a sale of digital tokens by small tech start-ups for a set price, with a promise that the proceeds will be used to create a specific new product, company or service.
“ICOs are a little like [crowdfunding company] Kickstarter on steroids,” said Hugh Madden, chief technology officer and co-founder of ANX International, a blockchain financial technology company.
Some $380 million had been raised via ICOs as of May, according to Forbes, largely from younger, tech-savvy people who see the offers being marketed on social media.
Venture capital funds have also been getting into ICOs. It’s understandable why, given that some tokens have become worth multiple times their initial value in the secondary markets. Since the tokens exist on a blockchain, they can be traded anywhere, including on cryptocurrency exchanges if there is enough activity.
ICO versus IPO
Madden is a huge believer.
“I think traditional IPOs will end up being dwarfed [in terms of fundraising] by ICOs,” he told AsianInvestor. “Regulators around the world are applying flexibility to new crowdfunding techniques… putting light-touch regulation onto these services to help them grow.”
He argues that ICOs have great potential because their digital nature means they are “frictionless”. Their relative simplicity appeals to many younger individuals, as opposed to the comparatively clunky registration processes for IPOs.
But ICOs have a long way to go before they will threaten traditional company listings—for one thing, their murky legal status needs to be clarified. That said, there is an opportunity here.
The number of listed companies in the US has been falling for years, from a peak of more than 7,000 during the 1999 dotcom bubble to around 3,600 this year. Yet yield-hungry investors continue to throw money at high-profile tech companies such as cab-hailing app Uber. As a result, the number of unicorns—private companies valued at $1 billion or more—is mounting.
ICOs, or a similar form of digital asset, could extend similar opportunities to the man on the street. The offers typically raise relatively small amounts, usually in the hundreds of thousands or low millions of dollars, and there is typically no minimum purchase amount (you can buy just one).
Of course there are risks, including sudden insolvency or assets disappearing. But the creation of digital retail assets makes sense. And they confer direct responsibility on retail investors; the buyers can’t complain if their tokens end up being worth nothing.
Learning such lessons is no bad thing, and some investments might even net the buyers tidy profits. And, as blowups occur, the legal and regulatory status of these new products should be solidified.
At a time when traditional investments are struggling to achieve 5% returns, it’s little wonder that more members of Generation Y are looking to take a punt on ICOs.