Can’t Stop The Crypto-ICO-Music
By Brett King, Speaker, Startup Founder, Bestselling Author, Radio Host, TV
Just last month the largest Initial Coin Offering (ICO) in history, albeit a brief history, raised an incredible $232 million in funding for Tezos. Tezos used both BTC (Bitcoin) and ETH (Ether) for its raise. Tezos, reportedly, wasn’t aiming to raise $232 million in funding, it was aiming for $30-50m, but they took in 65,693 XBT/BTC and 361,122 ETH in just days. Today, with Bitcoin trading at well over $4,000 the value of the BTC contributed to Tezos is over $270 million alone in today’s terms. It wasn’t that long ago when IPOs struggled to raise what Tezos raised in just hours through the application of crypto-currencies. Just 5 years ago ICOs were totally unheard of.
Truth be told, Tezos raised so much money with their ICO they didn’t know what to do with all the crypto-cash they had. So they started their own VC fund (Business Insider: What does a tech startup do after raising $232 million selling digital coins to investors? Set up a VC fund)
But if you are watching the ICO market you’ll realize Tezos is old news. Tezos no longer holds the record for the fastest $200m ICO raise in history. In just 60 minutes last week, Filecoin’s own ICO raised more than $200m. It’s possible with Bitcoin on a bullet this week that Filecoin’s ICO will actually beat out Tezos for the top spot once the dust settles.
For the first half of the year, CNBC has reported that ICOs accounted for more than $1.2 Billion in fund raising, more than VC-based early stage funding for the same period. That is an incredible statistic. Why? Because that $1.2 Billion is up from $78 million in 2016 (excluding the DAO’s failed $150m ICO), and in the United States, thanks to a recent announcement from the SEC – it might soon be considered illegal, retrospectively. If not illegal, certainly questionable from a securities perspective.
All time funding by ICOs hit $1.8 Billion this week, and with the way it’s tracking, I wouldn’t be surprised to see that pass $5 Billion by years end. Despite the SEC’s Investor Bulletin on ICOs just last month, things aren’t slowing, they seem to be speeding up.
Bitcoin and crypto-currencies on a surge
Bitcoin, Ether, XRP, Litecoin and others are all performing at near record highs right now with many traditional investors and traders looking on and shaking their heads. XRP is up almost 4,000% in the first half of 2017 alone, and today is listed on 30 exchanges around the world.
On May 22nd, 2010, one of the first real world transactions on Bitcoin occurred and will forever be memorialized as “Bitcoin Pizza Day”, when a BTC user paid 10,000 Bitcoins for two pizzas from Papa Johns pizza in the Bay Area. Today those Pizzas would be worth almost $43 million.
In February of 2011, Bitcoin wrestled with US$ parity, coming close numerous times before finally settling on the milestone on the 9th of February. In June, Bitcoin was trading at almost USD$30 per ‘coin,’ and then on the 19th of June, the first Mt Gox hack occurred with the price of Bitcoin plummeting back down to USD$2.00 over the months following. Of course, the second and more serious hack of Mt Gox that took it down occurred three years later in 2014, and almost bought Bitcoin to its knees. At that time Mt Gox was handling almost 70% of the exchange volume of Bitcoin globally.
For many, this was evidence that Bitcoin was doomed – clear evidence of the fact that Bitcoin was subject to weaknesses due to its computer-based nature that other currencies weren’t subject to.
However, the nature of Bitcoin was changing – people were starting to talk about the future value of Bitcoin in incredible terms. By 2013, Bitcoin had passed the USD$1,000 value mark, and topped out at $1,242 near the end of the year. But then all hell broke loose again as the Chinese government banned financial institutions from dealing in Bitcoins. The price of Bitcoin then steadily declined over 2014 and reached a level of trading around $200-250 throughout 2015. Many traders and analysts thought that Bitcoin had reached a stable point of trading and it was unlikely to revisit its heights of 2013. They were obviously wrong. So what happened? How did so many get it wrong and what happens next?
Before Babylon, Beyond Bitcoin
If you haven’t read Dave Birch’s latest soliloquy (Before Babylon, Beyond Bitcoin) as yet, please avail yourself of his brilliance. One of the key points Birch makes in his review of the future of crypto-currencies is that money has increased in both utility and function, and that money must become intelligent, ultimately a form of technology itself.
While this might sound a little bit like science-fiction, Bitcoin and ICOs are simply part of the digital evolution of our monetary and trading systems. I wrote myself on Why Money is Disappearing back in 2014 over on Medium. But there’s something more happening here.
Blockchain is a new architecture enabling applications like Bitcoin and ICOs. Some say ICO token sales are the “killer app” of blockchain. But consider this, these applications have become almost self-sustaining today, with enough market capital that total failure is becoming inconceivable. Once Bitcoin surpassed the value of Gold, it became an asset class that can hedge against market changes in unique ways. It’s no longer the global currency that early bitcoiners preached it would become, but it is a digital form of gold that has held and appreciated its value for almost a decade now. While volatile, its performance has made it a solid long term bet.
Some have asserted that Bitcoin is a Bubble, like the South Sea Bubble or the Great Tulip Craze. These bubbles are often created with investment vehicles highly subject to market speculation, often with the creators making the big bucks as the craze reaches the broader market. The South Sea Bubble used network effect like Bitcoin and ICOs by giving British politicians, lords and even royalty access to a form of stock options, which encourage them to pump up demand for the stock (they could hold their stock without cash changing hands and sell it back to the company or to the public once the market price exceeded their option price). Ultimately, the claims made by the South Sea company were found to be fraudulent, and an act of parliament ended up moving us toward the modern stock exchange to protect the market from these types of frauds in the future.
The total market cap of crypto-currencies today exceeds US$130 Billion, or approximately the value of Boeing as a company. Bitcoin alone holds the same market cap as Netflix in today’s terms. However, rather than being purely an asset class in a speculative bubble, ICOs are now distributing Bitcoin’s value across tokens that are linked to a wide range of companies – operating in a very similar way to the way securities are issued on an exchange. ICOs have the advantage today of not being subject to intermediaries, and the secondary market opportunities for ICOs long-term appear to be pretty robust.
The problem for regulators is that Bitcoin, alt-coins and ICOs have become self-sustaining in the same way that the stock market is self-sustaining. As long as enough investors participate and their exposure is limited or diversified, the likelihood of a complete collapse of Bitcoin or Ether coins is about as likely as the complete collapse of a secondary stock market today.
That’s not to say that the occasional bad actors that might issue their own ICOs won’t affect the price of Bitcoin or ETH. The collapse of a few token-based companies and funds are certainly more likely than the collapse of a publicly traded company. The fact that tokens enable emerging start-ups to raise capital without listing and without giving away equity, is simply too compelling for founders. Thus, it is likely more capital will flow into the ICO market over time, and ultimately in 10 years, the total ICO market will surpass some of the world’s smaller stock markets in market capitalization terms.
The trick here is that the ICO represents a sort of systemic shift that we saw after the South Sea Bubble collapsed, not the South Sea Bubble itself. This is the formation of a new marketplace built without the legal and geographical hurdles of the stock markets that operate globally today. ICOs on top of crypto-currencies are simply an IP-optimized system designed for value exchange in a real-time world, where the value is decentralized, based on computing power and network effect, not central banks and act of parliament. ICOs are, like most Fintechs and technologies, an attack of friction itself. The friction of raising capital
I believe the regulators who win will be those that enable a light touch process for legal ICOs, encouraging investment, but with enough protection to weed out the bad actors. The investors who win will be those that invest in crypto-currencies for the long-term and pick tokens that are clearly linked to the performance of the company they’re invested in, and not designed just as a way to raise funds sans equity. As with the best markets, the best performing companies will win for both their investors and for their founders. Bad actors won’t be able to kill this. But they will force us to regulate the ICO market just like the South Sea Bubble.
It’s not going to be a total crash and ICOs disappearing – it’s just going to be the formalization of the ICO market by regulators, backed by crypto-currencies. So hold onto those Bitcoins for a bit longer. It’s pretty much unstoppable.