Will Initial Coin Offerings Fund the Future?

By boris, May 01, 2017

One innovation we have seen in Blockchain has been the rise of app coins as a way to monetize protocols and open source projects. Most launches were through Initial Coin Offerings (ICOs), basically crowdfunded app coin sales. And boy, has it taken off!

In 2017 alone, ICOs raised more than $100 million in 15 deals. Cosmos Network raised $16.8 million in 30 minutes and Qtum raised $15.4. Most recently, Gnosis (a decentralized prediction market) raised $12.5 million at a valuation close to $300M in just a matter of minutes (the valuation has more than quadrupled since in secondary markets).

Note that most of these ICO-funded projects have not publicly launched yet. We are seeing much larger valuations and sizes of rounds with ICOs than with the traditional VC market for companies at similar stages.

So what is going on? Is this an ICO bubble or smart funding of the next technology platform? It’s probably a bit of both.

On the bubble side… A lot of people have made money through crypto-currencies (Ethereum is up more than 500% this year), so we can assume that people are pouring some of this money into new projects.

There’s also a strong FOMO (Fear of Missing Out) effect at play. Many of these offerings are run as auctions with a scarce supply of tokens. This naturally triggers the “I need to get in on this now” feeling.

However, we’d be remiss if we just called the ICO market a bubble and left it at that. We might be seeing the emergence of a new technology platform coupled with a business model change. That’s a very powerful combination.

The big winners have tightly linked tokens to usage of their platform, thus creating strong network effects. If the protocol is useful, it attracts developers to build on it. In turn, this increases the usefulness of the protocol and encourages more usage, which increases demand for the underlying token. And so, the price of tokens rises and this further attracts developers to build more apps on top of it. And, the feedback loop continues…

The other factor is that most of the current projects are on the infrastructure/protocol layer, which has different dynamics than Internet platforms. Here, the expectation is that most value will be accrued at the protocol, not the app layer.

Joel Monegro of USV wrote about this last year: “The market cap of the protocol always grows faster than the combined value of the applications built on top, since the success of the application layer drives further speculation at the protocol layer. And again, increasing value at the protocol layer attracts and incentivises competition at the application layer.”

For those of us who are participating or watching this space, it’s hard not to compare it to the Wild, Wild West. Earlier this month, a company called Matchpool raised $5.7 million in 48 hours. A day later, the co-founder departs alleging the misuse of funds by the CEO.

I’m not yet sure if the ICO successes will solidify before the disappointment from some of the weaker projects take over. But all in all, it feels like the future is being funded through ICOs these days.

 

  • Great post. I think ICOs are here to stay. ICOs like Gnosis worry me, but the market will correct it in the long term. We will have standardized processes around ICOs that will make the market more legitimate. I still don’t think there is a bubble because many regular people don’t know how to buy cryptocurrency let alone buy into an ICO. I tried to explain to my mom how to buy the RLC ICO and she was very confused.

    I’m very optimistic about the cryptocurrency market as a whole, but I think in the short-term the market looks a bit frothy. In the long-term, we are in the beginning of the S-Curve from an adoption standpoint.

  • bwertz

    Great thoughts! Definitely agree that standardization of ICO’s will help – and yes, long-term opportunity is immense.

  • If we compare the rise of the recent ICO trend to the tech bubble in the 90s, I think we are around 1996/1997.

    The total combined marketcaps of all cryptocurrencies right now is 37 billion.

    (http://coinmarketcap.com/charts/ is the source)

    https://uploads.disquscdn.com/images/3e7cd60b3f2083e0310a9edf28065491f6dedc6ecfc6b769073649807ace3a41.png

    Of that, 15 billion is the altcoin marketcap, which has hockey sticked in the last month.

    Perhaps altcoins are entering bubble territory right now, partly fueled by the huge ICO raises during the last 4 months.

    Most of these tokens are launching at high valuations not driven by their fundamental value, but by the value of the cryptocurrency used to buy into the ICO (Ether and Bitcoin).

    Most altcoins currently have no fundamental usage, and transactions are 99% used for speculation (on chain transactions primarily are just investors sending to the exchange to trade).

    That could change in the next few years as the decentralize app stack is maturing, allowing for consumer products to be built on decentralize networks:

    https://medium.com/@FEhrsam/the-dapp-developer-stack-the-blockchain-industry-barometer-8d55ec1c7d4

    I’d say by 2020 we will have the first unicorn decentralized app using cryptocurrency and blockchain technologies exclusively.

    However this hockey stick chart might not have even gotten started yet. The rate of money coming into the space globally is staggering, just this week alone South Korea had incredible volume for buying Ethereum Classic with KRW.

    https://uploads.disquscdn.com/images/7b6581f2ce01eaee00ccfb91729b461f78987ddb4d8e848e31b016ccc1c1cc9a.jpg

    Japan recognized Bitcoin as money in April.
    http://www.newsbtc.com/2017/04/02/japan-officially-recognises-bitcoin-currency-starting-april-2017/

    Volumes are increasing. Today we broke 1.5 billion dollars in daily volume, of which at least $250,000,000 was in USD alone.

    Then to put the marketcaps in perspective, Cryptocurrency is a larger marketcap than all above-ground silver (~20 billion USD) and altcoins alone are now bigger than Twitter (12 Billion USD) … but Netflix still has cryptocurrency beat with 2X the marketcap of all cryptocurrency including bitcoin.

    We still have 2 big groups to come into the space:
    1) sovereign wealth funds worth hundreds of billions
    2) average person on the street.

    When retirement funds are able to start moving into NYSE traded cryptocurrency index funds, then we will be at peak ICO FOMO bubble territory.

    Total marketcap of bitcoin could be 1 billion easily.

    Total marketcap of all cryptocurrencies when ICO fever really hits … hard to predict, but we have a LOT of room to grow.

    When you start over hearing people talk about what ICO they are buying in the lineup at starbucks, it’s time to cash out 🙂

  • bwertz

    Thanks for this extensive comment – some great data points in there. Agree that the money inflows seem to be accelerating right now.

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