By Andy Gordon
Editor’s Note: Today’s article comes from Andy Gordon, co-founder of Early Investing LLC.
Initial coin offerings are on fire. Known as ICOs for short, they differ from venture capital and crowdfunding as a way for young companies to raise money.
Coins, not equity, go on sale. Coin owners can use the coins to access the company’s services if and when it becomes available. In the meantime, if the coins are popular and attract a lot of buyers, their price can go up – sometimes by a lot. They’re then liquid enough to buy and sell on specialized exchanges.
So far this year, 130 ICOs have raised $2.7 billion. That’s an enormous amount of money. These offerings are now raising more funds for the cryptocurrency community than traditional venture capital rounds. Take a look at this chart…
But the news isn’t all good. In July, the SEC said that non-utility tokens could be treated as securities in future ICO raises. The warning did nothing to slow the explosive growth of ICOs.
When China banned ICOs and shut down cryptocurrency exchanges, growth paused and prices fell. But within a week, they were rebounding strongly.
Classic signs of a bubble, right? Good news gets amplified. Bad news gets blown off… until the bad news utterly overwhelms the good news and bursts the bubble.
Is that what’s happening now?
Bad News Does Not a Bubble Make
There’s plenty of bad news and talk of bubbles going around these days.
Case in point: Bancor.
It raised $153 million in a matter of hours this past June. Like a lot of ICOs, its idea can move the needle… but only if it works.
Bancor’s technology creates Smart Token contracts that can serve as their own market makers, automatically providing so-called price discovery and liquidity to other coins.
Bancor’s technology has come under criticism – a big reason why its price has dropped more than 50% from its ICO price.
Is Bancor a scam or dud? Absolutely not.
The size of the opportunity it’s targeting is huge. Bancor’s team is more than credible, and the technology is complex enough to warrant a large fundraising effort.
Tezos, another blockchain-based smart contract company, has also attracted the wrong kind of publicity.
Its software formalizes the process of upgrading a blockchain protocol in order to avoid forks and mitigate power struggles within cryptocurrencies. Its ICO collected an eye-opening $232 million.
It’s another BIG idea – and one that is much needed. But its husband-and-wife co-founders are enmeshed in a spat with the foundation’s director, and accusations are flying in both directions. The optics are not good.
But, again, not something I’d call a scam or dud.
Listen, I’ve been a big believer in bitcoin, cryptocurrencies and blockchains for a long time. It’s another exciting form of early investing, where the upside is special. But I’m not naïve about the market either.
Most ICOs will struggle to succeed.
Like startups, ICOs raise money at a very early point, pre-revenue and often pre-product. Nobody is entirely sure how well the product will work. Even if it does work, nobody knows how it will …read more
Source:: Investment You
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