We live in interesting times and there are literally thousands of ICOs — or initial coin offerings — hitting the market.
Many tech startups have turned to ICOs as an alternative to more traditional ways of raising funds.
In Australia, ASIC has established some solid guidelines to provide a framework for ICOs. In many other countries, such as China or Korea, there are discussions about potentially blocking ICOs. And some jurisdictions have decided to treat all ICOs as if they are a security.
There are other nations, such as Canada, that are currently assessing their position.
The near-nation-state of Facebook, with more than 1 billion ‘citizens’, has decided to ban crypto currency and ICO advertisements.
(Please note: Techworld does not provide financial advice. As with any investment, you should seek independent qualified financial advice.)
90 per cent of ICOs I would never touch
It is clear to me that many ICOs are akin to a penny stock and have no underlying value. What are some of the warning signs?
I look for a real company that has a tangible asset and that have a sensible use case for blockchain. If it doesn’t smell right — it probably isn’t.
A whitepaper will outline the purpose and intent of an ICO, and I will read it — until it makes sense. And then re-read it.
Before committing any funds to an ICO, I’d look for endorsement by Australian Blockchain Standards group and also where applicable the industry bodies.
If an industry player has bought into the idea, it gives an ICO much needed reputational support and a committed user of the new service or product.
So I’m buying a token, not a crypto currency?
A token by itself has no intrinsic value, but does have the traceability and other features of the blockchain. A token is backed by a crypto currency.
When you subscribe to an ICO you are buying a simple token that has been ‘branded’. There is an exchange rate of this branded token that is established at inception with the reference crypto currency.
This reference price is supposed to protect you from manipulation of the value and set a baseline that you can rely on.
The digital world means digital capital markets
We raise money to run businesses; in the past this has been through mechanisms such as share markets and IPO events. Such activities can take years and months of planning to execute.
An analogy for ICOs is crowd funding, which may have some similarities to share offers but doesn’t confer ownership
In this new world we remove all the extra inefficient processes of the market and you (the crowd) elect to fund companies that you believe in. There is no share certificate, no dividend cheque and no voting rights. It is a brave, and sometimes dangerous, new world.
What happens after the ICO is complete?
In effect, you have participated in funding a start-up that then invests these funds into their business. As an investor you are hoping to make a return to match the risker investment that you have committed for.
Your option then is to sell the tokens in the secondary market, which is quite similar to buying and selling traditional shares.
There will be some big winners and many losers.
What are the issues with ICOs in Australia?
Right now, this is about market depth — it is a thin market. If you choose to participate in an ICO, you will want to invest in areas where the token is going to see uptake and be used.
A final note
ICOs are new and, naturally, should be approached with caution. I would expect them to start to become mainstream over the next few years. My advice is to understand both the risk and the potential upside and be sure to look for opportunities that allow industries to be radically transformed. And if the concept doesn’t make sense, then it probably needs to be avoided.