VC vs ICO, race of cryptocurrency
ICO(Initial Coin Offering) is the latest fad for blockchain based startups to raise funds. The frenzy behind ICOs in social networks can be compared to the gold rush in old Wild West history. Coinbase, the first crypto unicorn (most reputable for its safe and compliant crypto trading platform) has already raised $100million in Series D funding at a valuation of $1.6B led by IVP. Startup Brave by Mozilla founder raised $30M in 30 seconds for its web browser product. Why do non-traditional investors love it? It’s because they can store value in many more ways than traditional equity shares when it comes to cryptocurrency via ICO. Brave created BAT(Basic Attention Token) and sold 1b of them. Following them are Omise, Kik( it’s ICO will be releasing soon) and I’m sure many more will rush into it. Through ICOs, startups have raised $1.2B, surpassing the early stage VC funding of internet companies for the past two months.
How does an ICO work? A startup sets up the value based on what they think their net worth is and creates new cryptocurrency on ethereum, an open ledger. The price dynamics is basic market demand and supply controlled by network effects. Cryptocurrency is a network distributed digital commodity and that’s where mostly its value lies.
Bitcoin/ethereum, on the open source blockchains, runs without central authority and is considered the first decentralized application in finance till date. The network effect of traditional currencies that derive their value from exchanges, marketplace, media have been strong whereas that of cryptocurrencies have been stronger due to social network effects running without regulations of govt. authority. The price of 1 bitcoin is $4439.99 (17th aug 7:01pm EST)and it was in its $3000 range last week. The value is based on the basic economic fundamentals that the worth of services or products increase as more people purchase them and accept them as form of payment. The liquidity in cryptocurrency is higher compared to VC funding’s long haul exit via IPO or acquisition. Investors can convert their currency into legal tender through any crypto trading platform like Coinbase. But the traditional investors’ skepticisms lie in the regulatory uncertainty, lack of due diligence, lack of business use cases and high valuation. The confusion on the purchase agreement of the recent EOS token ICO was enormous. Silk Road, an online marketplace allowed users to buy drugs off the internet through bitcoin, got shutdown by authority in 2013.
ICOs don’t offer equity but a promise of discounted cryptocurrencies before they hit the exchange. The SEC and other govt. regulatory boards are yet to catch up with the technology. The regulatory boards are watching the market closely, similar to what the SEC did with high frequency trading. Most of the countries do not make usage of cryptocurrency illegal except Bangladesh, Bolivia, Ecuador & Kyrgyzstan. The EU has no specific legislation except that VAT/GST is not applicable. As the G7 stated in 2013, the increased risk of money laundering, scamming, terrorist financing is associated with the rise of cryptocurrency. The PBoC (People’s Bank of China) has also alerted its public to stay away from possible pyramid scheme.
Let’s go back 300 years — During US pre-independence era, colonies used to have their own currencies. Paper bills used by them were “bills of credit” which were usually fiat money used for paying debts by colonies. Too many printing of such currencies and few other things led to their inflation which was heavily criticized by Adam Smith in his ‘Wealth of Nation’. It’s interesting how resourcefulness of human race led to many ‘creative destruction’.
21st Century — Speculation, skepticism, and fanfare about Cryptocurrency now are just like that for computers in the 70s and the internet in the 90s. Bitcoin, ethereum are here to stay, the earlier the regulatory boards understand and step in, the better will be the prospect for all of us, thus adding promising values to existing industries. Cryptocurrency may make banks irrelevant if not adapted properly. Creative destruction’ as economist Joseph Schumpeter described is an organic and dynamic process in our economy. It occurs when innovation leads to disruption of long standing market behavior and free up resources. Entrepreneurs create disequilibrium in the active market and push new technologies with profit creating new market behavior that did not exist before. Adaptation is the key to this evolutionary process, especially in this 21st century, which is beneficial in the near as well as long term macroeconomy. Now whether ICOs will give Silicon Valley and Wall Street a run for their money, that will be seen sooner than expected.
