ICOs & early stage investment
What you'll learn
- Understand what an ICO is; the history & hysteria
- The evolution of ICOs
- What an investment platform is
- Potential returns & risks from early stage crypto investment
In the early days of Bitcoin, the concept of “earning” from cryptocurrency was largely confined to mining. Miners – first individuals and later pools – received bitcoin as a reward for committing blocks of verified transactions to the blockchain.
Fast-forward to the modern day and there are numerous ways to earn, from staking and trading to selling goods and services in exchange for cryptocurrency. Another way of gaining exposure to digital assets is via ICOs and investment platforms.
ICOs – Initial Coin Offerings – are essentially crowdfunds that raise capital for new crypto-related startups. ICOs are crypto’s stripped-down version of the stock market’s IPOs (Initial Public Offering), wherein the shares of a private corporation are offered to the public in a new stock issuance.
In 2017, ICO mania gripped the industry as close to $5 billion was raised from investors queuing up to lay their hands on newly-created tokens. These intrepid investors were evidently hoping that their assets would – like Bitcoin – soar in value. Some did, many didn’t; ultimately the ICO bubble burst as crypto entered a protracted bear market.
Although early-stage startups tend to raise funds through private token sales and seed rounds these days, ICOs occasionally spring up and give everyday investors the opportunity to “get in on the ground floor.” There are also dedicated investment platforms that offer the prospect of a healthy return, giving users the chance to bootstrap a promising new venture.
While we can’t show you how to earn crypto from ICOs, we can certainly tell you more about them; deciding which crypto projects to invest in is down to you.
The history of ICOs
Although ICOs are synonymous with 2017, the first ever token sale was held four years earlier. In 2013, Mastercoin raised $500,000 worth of bitcoin for a venture that sought to leverage the Bitcoin blockchain while adding additional features to it.
Soon other projects were following suit, tapping into bullish investor sentiment by exchanging dollars for utility tokens that, in many cases, had no real purpose.
In 2014, Ethereum came to town and raised 3,700 BTC ($2.3 million) in just 12 hours. Unlike some of its predecessors, it was a sophisticated project that had staying power – and it didn’t take long for it to become the number two cryptocurrency after Bitcoin.
Ethereum also became the leading blockchain platform for ICOs themselves, with tokens generally based on its ERC20 standard. ICOs effectively eliminated the barriers to early-stage investment, giving anyone with ETH the ability to fund a project they believed in.
The success of Ethereum convinced many investors that it was possible to earn crypto from ICOs. Few cared that these fundraisers were risky and unregulated, and though it might have been difficult to parse the genuinely promising projects from the boom-and-bust schemes, capital flooded into the market.
Two years after Ethereum’s record-breaking token sale, The DAO set a new benchmark by raising $150 million worth of ETH. A year later, in September 2017, Filecoin raised $257 million.
By 2018, the ICO market had largely collapsed. There were many reasons for this: increased regulatory scrutiny from the Securities and Exchange Commission (SEC) who deemed many ICO tokens securities; dwindling ROI caused partly by the onset of crypto winter; and a ban on ICO advertisements by platforms like Facebook, Twitter and Google.
Though the intentions were good - democratise early stage investment - in practice the ICO craze mirrored a lot of what’s bad about traditional investment, including the Cantillon Effect.
This describes how the financial system rewards participants simply because they have privileged access to liquidity - money comes to money.
The way ICOs were structured, early investors got discounted tokens, which normally meant investment funds that were invited to participate. Access was gradually broadened with diminishing discount, but enough frenzy to guarantee uptake, rewarding the early investors who could bail with immediate profit, leaving latecomers holding the bag.
At an even simpler level there were plenty of examples of big ICO investors gazumping smaller participants by applying ridiculously high transaction fees, essentially front-running the process.
Some ICO startups were exposed as scams, deleting their websites and social media pages and making off with their ill-gotten gains.
ICO evolution: STOs, IEOs
Despite the bad press generated by exit scams, many ICOs have generated incredible returns for investors. However, it should be remembered that they are not get-rich-quick schemes: the best projects are those that have the potential to yield returns over a long time period. It’s about investing in a viable business that serves a need and has talented people behind it.
The ICO landscape has evolved, and there are many similar processes by which investors can invest in crypto projects. Security Token Offerings (STO), for example, give investors the chance to hold digital tokens representing assets (stocks or bonds) in a crypto company, with their ownership recorded on the blockchain ledger.
In other words, investors get to hold a regulated security rather than an unregulated altcoin that could, for all intents and purposes, be worthless.
While ICOs are targeted at the general public, STOs are generally geared towards accredited investors. At the very least, investors must pass stringent Know Your Customer (KYC) checks to appease regulators. In this regard, they are less accessible than ICOs.
Another evolution of the ICO is the IEO or Initial Exchange Offering. Ostensibly, these are ICOs that list directly on a digital asset exchange, which is responsible for weeding out bad actors. High-profile exchanges lend credibility to a project, as their reputation is on the line if the project turns out to have no merit.
As far as ICOs are concerned, there are several platforms that list ongoing opportunities. One of them, Top ICO List shows all upcoming STOs, ICOs and airdrops along with details of the projects in question. Alternatively you can Coinmarketcap f, which provides similar information.
Crypto investment platforms
The runaway success of ICOs proved just how eager people were to invest in crypto-focused startups. So it was only natural that dedicated investment platforms and asset managers would spring up. Some of these, like Grayscale, are geared towards wealthy investors, while others are pitched at regular folk who just want to put their money to good use.
Investment platforms offer a means by which investors can gain exposure to crypto companies as a shareholder, rather than simply holding a native cryptocurrency, and benefit from the success of the underlying business. This can make them more appealing to investors who prefer traditional to see a pitch deck and hard financial data, rather than a whitepaper and address to send Ethereum.
They mirror the growth in general Crowdfunding platforms like Kickstarter, though aren’t positioned for very small investors. Investors must fit specific criteria that ensure they are sophisticated enough to understand how investing works and/or have the net worth to do this safely.
BnkToTheFuture is one example. To date, over $880 million has been invested by its users in crypto and fintech related projects including Kraken, Bitstamp and Bitfinex, all producing significant returns for early investors, though this doesn’t mean every investment will be a success.
With BnkToTheFuture (and platforms like it), investors’ funds are held in escrow, independent from the company and provisioned for investment in a pitch once it reaches its minimum funding goal. A range of payment methods are supported, and bank-grade security procedures (socket layers, 2FA) ensure investor confidence.
As with any investment, there are significant risks and drawbacks:
- A return on investment will only be reached by private sale or public listing
- The company could fold before that happens, meaning you lose your investment
- Holding SPV shares doesn’t give you voting rights
By investing, individuals are able to become an indirect shareholder in the startup or fund via a Special Purpose Vehicle (SPV) that holds their investment. Though the share of the SPV is essentially locked until the company is bought or publicly floated, there is a secondary market for the shares giving you an option to sell or, if you missed the investment period, buy-in.
The Evolution of Crypto Investing
Early stage investment platforms essentially require the broad longterm approach to assessing value known as fundamental analysis which we discuss in detail in our section on trading crypto.
They represent another step along the maturity path of crypto investing, which began with the mania of ICOs. Getting exposure to crypto outside of simply hodling or trading crypto is still relatively difficult. Many traditional investors don't want to get their hands dirty in this way, and would prefer to call their financial advisor or broker and ask them to find a fund or index to give indirect exposure.
Right now there are limited opportunities to do that. Grayscale have been the trailblazer selling GBTC - the Grayscale Bitcoin Trust - which gives investors exposure to bitcoin price movement without owning it, but you need to be an accredited investor.
The big turning point for crypto investing is likely to come from the approval of a US Exchange Traded Fund (ETF) which will enable a huge number of regular investors to get easy access to a fund that simply tracks Bitcoin or a crypto index. The SEC has rejected all ETF applications to date, but there are at least eight new submissions (at the time of writing) and Canada recently approved their first adding pressure on their neighbour, so watch this watch.
Should a Bitcoin ETF be approved, it would signal a major milestone in the evolution of the ways which you can earn crypto, putting it within the reach of pension funds and conservative investment houses, a far cry from that first Ethereum ICO.