Initial coin offerings are the latest fad for many emerging cryptocurrency companies and projects. From the recently completed Lisk, Waves and Mycelium coin offerings to the historic crowd sale by the DAO — which was subsequently hacked for about $60 million — to Bitland, Project Decorum, Elastic Project and a good number more sales, the trend is clear.
Cryptocurrency organizations are viewing their initial coin offerings as an opportunity to build capital and to provide a near-seamless method to distribute a percentage of their digital coins in exchange for a vested interest or stake in the organization. The stake in the corporation will naturally vary from offering to offering.
ICOs are similar to initial public offerings issued by corporations: They are essentially the first sale of stock in the form of an organization's cryptocurrency. ICOs can be bought with fiat currency or with another digital currency at a set exchange rate. Unlike what may be found in a typical IPO — especially the most popular ones such as last year's Ferrari, First Data and FitBit IPOs — an ICO lets people of all classes and ethnicities participate because of the low barrier to entry. Further, the sale occurs online, so it's borderless.
The entire phenomenon is an interesting mechanism carried out by cryptocurrency developers who have recognized the potential of digital currency and decentralizing technology. However, most if not all cryptocurrency varieties now emerge with esoteric blockchain-based features, capabilities and/or applications. Therefore, coin offerings are also pigeonholed by existing within a niche sector: anything blockchain-based.
Sure, there are many ways you can subdivide or subcategorize cryptocurrencies. However, the resounding and important question is: Can every blockchain-based project to emerge produce something innovative and of future value?
Ethereum's offering in the summer of 2014 is a strong, if not paramount, example. The coin sale's immediate aftermath was a bumpy road. With a supply of 72,524,960 ether (abbreviated ETH), Ethereum's market capitalization opened at around $180 million before plummeting to $42 million to finally moving up to $122 million — all within the first week and a half.
No one then could have known how the cryptocurrency would become worth more than $1 billion market capitalization — rivaling the world's most valuable cryptocurrency, the one that kindled it all in 2009.
But Ethereum offered, and continues to offer, a unique platform within the blockchain space. It incorporates smart contract capability with other emerging features and it allows developers to build applications on top of its blockchain layer. It is an innovative platform that offers and inspires innovation in a wide array of use cases, via products and services that can be based off of the Ethereum's blockchain. It has also spawned some of the most successful crowd sales of recent: the DAO, Augur and DigixGlobal.
Yet, great ideas — whether an autonomous, crowdfunding organization (the DAO), a decentralized prediction market (Augur) or an asset-tokenization to apply to physical assets (DigixGlobal) — are not a dime a dozen. Not every token sale or ICO will turn out like Ethereum's.
Therefore, ICOs may just serve to dilute the appeal of cryptocurrencies and reduce esteem so critical to the success of emerging technologies. Put another way: The greater quantity of ICOs, the greater the risk of creating a stale investment environment. From a practical investment perspective, whether every cryptocurrency will reach heights set by current giants in the space is something to consider as well.
In an article on prospective shifts in computing paradigms published by the nonprofit Institute for Ethics and Emerging Technologies, a nonprofit based in Connecticut, Melanie Swan described:
" … a continuously connected seamless physical-world multidevice computing layer, with a blockchain technology overlay for payments, and not just payments, but micropayments, decentralized exchange, token earning and spending, digital asset invocation and transfer, and smart contract issuance and execution; all as the economic layer the web never had."
The "connected world" paradigm envisioned above is the beautifully envisioned endgame. Initial coin offerings thus stand at the starting point. Therefore, they should be gauged by two practical factors:
- Is the technology useful? In other words, does the use case purport to help move toward something beyond the current computing paradigm or what is currently in the market?;
- How well has the organization moved to achieve its outlined objectives?
Only so many companies or teams will innovate and only some will endure. The more projects funded — and that ultimately fail — the worse the result for the general advancement of the industry. Sure, it will not stall the ecosystem; however, it may compound doubt within an already often misunderstood area of technology.
The cryptocurrency ecosystem operates on the fringes of tradition, with coin offerings announced, talked about and carried out largely via online forums and without regulation. The entire phenomenon is high-risk and should be treated as such. Steer clear of anything that appears too good to be true, devoid of any clear value proposition and with a lack of transparency in design, leadership and direction. Exercise caution, and do research and a speculative analysis of the value proposition being claimed in coin offerings.
Analysis on whether the technology being offered is something that advances or will help advance the current computing paradigm is necessary. Perhaps, in the end, skepticism around every new ICO is a positive sentiment.
The wonder is whether too much of one thing will begin to strain the investment environment, especially if promising projects like the ones mentioned fizzle out with no return — and if probability stands true, they wouldn't be the first, nor the last.
Brandon Kostinuk is the communications lead at the Vanbex Group, a professional services firm that provides consultation and marketing services to clients in the digital currency and blockchain space. He can be reached at firstname.lastname@example.org.