Former Chinese deal maker, Richard Liu, gave up a salary with seven figures earlier this month to get involved in one of the most talked about financial instruments of our time, initial coin offerings (ICO). Since that time, Liu was backed a number of cryptocoin sales that have raised millions of dollars in quick periods, many times without a single product to show for it.
For Liu, the chance to shape this new aren’t outweighs any danger of a crackdown or market crash. Somewhat similar to IPOs, ICOs have been raising millions of dollars from investors who want to be in on the next bitcoin. However, this growth which is largely unchecked has been compared to the dot-com boom of the past.
“Traditional investment banks and VCs need to monitor this space closely, it could become very big,” said the partner at hedge fund FBG Capital, which has backed about 20 ICOs.
“Unlike the traditional financial sector, there are no ceilings or barriers. There's so much to imagine,” he said.
Critics of ICOs believe they are nothing more than imagination. As a melding between crowdfunding and an IPO, they involve sales of virtual currency, based on the Ethereum blockchain, which is similar to the technology behind bitcoin.
What Makes ICO Unique
However, what makes them different from IPOs where buyers receive share, investing in an ICO provides you with virtual tokens that are unique to the company you are investing in. What this means is that these tokens only grow in value if the business turned out to be viable by boosting liquidity and attracting more people.
“These ICOs are not selling shares, which means their investors will have to count on the promise and reliability of the founders,” said Beijing-based Chandler Guo, a bitcoin miner and angel investor who's helped more than 20 ICOs list on cryptocurrency exchanges. So “I don't invest in any projects unless I know where they live and their mother lives”.
Cryptocoins don’t require banks or venture capital firms, which allows quick access to money. However, that also means that there are few checks and balances. Because of that an investor need to thoroughly research any startup they get behind to ensure they believe value will continue to go up over time.
Hugh Madden, former HSBC forex-trading architect who is now chief technology officer of ANX International helped in raising $18 million for cryptocurrency exchange OAX. He compares owning ICO tokens to being a member of a football club. You may not get any special perks, but if the team gets better, prices go up and fans increase.
When a football club “builds more relationships with other clubs, gets more matches, and generally enjoys wider adoption, then more people want to be a part of it,” the 40-year-old said. “There is no limit to participants, but there is a limit to memberships that allow members to exert influence on the future direction of the club.”