Tag: Crypto

Rising Trend of Initial Coin Offerings

According to a report by Mangrove Capital, 204 ICOs have made a return of about 1,320 percent.

At the same time, investment banks and hedge funds have shown increasing interest in the digital currency with over 55 crypto-specific hedge funds. Before diving deep into why investors are showing greater interest in cryptocurrency, let’s take a look at what ICO is.

 

What is ICO?

Unlike conventional financial system, ICO or Initial Coin Offering is an alternative and unconventional way of crowdfunding. It has enabled a number of successful firms and projects to get the finance to start their business. New businesses and startups around the globe are getting millions of dollars in funds by issuing digital coins. The rising trend of digital currency has made people both worried and excited.

In ICO, the coins bought by investors are for businesses and marketplaces that are not developed yet. By purchasing these coins, they make a bet that a firm or startup will end up becoming successful and as a result, the coin will increase in value.

In average it takes about six months or a year to raise money with conventional venture capital (VC) system, but it is different when it comes to ICOs. In this token crowdfunding, you get to have a large crowd of engaging supporters who want to see you succeed. Not only do they campaign for you, but they are also your early adopters.

 

Growing Trend of ICO

Startups have raised more than 2 billion dollars since the start of 2017. It is a huge amount of funding, given the fact that not many people knew about it a few years ago. Businesses are making money via this mode of funding faster than usual.

In April this year, Gnosis (prediction market for Ethereum) managed to raise 12 million dollars in just ten minutes. In June, Mozilla’s founder raised 35 million dollars by selling Basic Attention Tokens in under 30 seconds for his new web browser startup called ‘Brave’.

ICOs have become the name of the game as they have left the venture capital market behind and are the biggest source of funding. It is a great option for those companies that are pursuing the application of blockchain technology.

 

Concerns by the Regulators

Despite the increasing trends of ICOs, regulators have shown serious concerns. They are warning investors that it is a high-risk investment.

Although, some coins value has dramatically increased, a very high volatility cannot be ignored. Some have also considered it a ‘speculative boom’, but that did not stop investment banks and hedge funds from showing their interest by making an investment in cryptocurrencies and ICOs.

 

Reason behind the Increasing Interest of Institutional Investors in ICOs

The digital currency market has made massive profits in the past one year or so. Initially, institutional investors were curious about what this is all about, but they started getting a hang of it gradually and became less apprehensive and more interested in this alternative investment. It is a kind of chain reaction that started with the rising interest among venture capitalists and now institutional investors, including mutual funds, investment banks, and hedge funds are following their lead. They have shown growing interest and are making an effort to estimate and grab the opportunities in the cryptocurrency market.

The reason why they are more interested in the new and unconventional currency is that it promises a higher return as compared to market averages. According to a fintech analytics firm, there have been at least 55 cryptocurrency hedge funds and a former manager at Fortress, Mike Novogratz, has recently announced a plan to use 500 million dollars for a new digital currency hedge fund. Blockchain Capital also made an announcement of raising 150 million dollars; a part of this fund will be for cryptocurrencies.

 

Goldman Sachs’ Approval

Goldman Sachs is planning to set up a bitcoin trading desk, as they believe that institutional investors are interested in cryptocurrency more than ever. The firm has reported it to be ‘a major milestone’. They believe that the investors need an over-the-counter brokerage platform where they can sell or buy as much cryptocurrency as they want. Goldman Sachs is of the opinion that it can take up this role, but there will be other issues, including market infrastructure and serious concern by the regulators.

 

If, however, ICOs becomes regulated, it will change the way how businesses raise money and will also impact the venture capital market.

ICOs Surpassed Early Stage Venture Capital Funding

New startups that raised funds through Initial Coin Offerings (ICOs) have now surpassed the early stage VC Funding for internet firms.

But before diving into it, it is important to know what ICOs are.

 

What is Initial Coin Offerings?

This is another way of raising cash.

Cryptocurrency and blockchain startup companies raise capital through ICOs by selling tokens of investors in exchange for equity funds. It is somewhat the same as Initial Public Offering in which stocks are issued in exchange for equity. Just like crowdfunding, ICOs provide a way to get funds from users by enabling them to have a share of the business. They get digital currency in exchange for the money they invest in the business.

 

Rising Popularity of ICOs and VC Funding

ICOs have gained massive popularity in the last few months among blockchain and cryptocurrency startups. In April this year, the total capital raised via these offerings was around $100 million and in May, the amount went up to about $250 million. The month of June turned out to be the biggest surprise when the total funding exceeded $550 million. According to Goldman Sachs, it was the first time that it performed better than seed and angel venture capital funding. Early stage and angel venture capital funding was less than $300 million in June.

In July, the offerings were a little more than $300 million, whereas, early stage and angel funding was just a bit higher than $200 million.

 

Popularity Among the Celebrities

ICOs have become so popular that even the celebrities, including Paris Hilton and Floyd Mayweather, have started jumping on board. In fact, Paris has been involved in it for over a year now and also met the COO of Ethereum last year.

 

Total Value of ICOs in 2017

The total value raised by 92 ICOs in 2017 is $1.25 billion. This is a really good number, given the recent boom of such offerings in the VC sector. There are so many firms that have used these offerings to raise money. For example, Tezos managed to get the capital of over $200 million by creating a new blockchain, whereas, another firm, Bancor secured $153 million via ICO.

 

Criticism and Scrutiny from Regulators

Despite the boom, this phenomenon has been under severe criticism and scrutiny from regulators and other authorities. For example, the Monetary Authority of Singapore (MAS) released a statement in which it was mentioned that these offerings are exposed to money laundering and other terrorist financing risks, because the nature of these transactions remains anonymous. Another concern raised by the MAS was the collection of large amounts of capital in such a short time frame, which makes ICO vulnerable to high-level risk.

On the other hand, the Security and Exchange Commission (SEC) said in July this year that the security law of the U.S. will be applicable to this cryptocurrency. The experts are also showing concern over its legitimacy. They have highlighted that the sale of a cryptographic token makes the investor entitled to a certain share of profit in the firm, which can be considered as a violation of financial rules and regulations. The People’s Bank of China and a lot of other government departments have released a joint statement that people and firms that have raised money through ICO should also make arrangements to return that capital.

 

Firms Facing Increasing Risk of Getting Hacked

Despite all the boom and criticism, the risk of ICOs cannot be ruled out. A clear example of this is CoinDash that initiated an ICO, but ended up getting hacked in July. As a result, all of its funds got stolen. Although, it has gained popularity in the past few months, yet, the risks cannot be ruled out entirely.

 

Future of ICOs

The Chief Information Officer of UBS, Oliver Bussman, raised his concern and said that strict regulations and measures, as applied to IPO businesses, are required in ICO to safeguard the interest of investors. However, he is quite confident about this new mode of raising funds and expressed that such offerings will continue to happen in future. He said that as a new business model that is benefiting the blockchain technology, ICO will continue to sustain by combining hybrid equity ownership/currency and crowd funding.