The Crazy (and Profitable) World of Initial Coin Offerings

by Andy Gordon
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Editor's Note: Today's article comes from Andy Gordon, co-founder of Early Investing LLC.

Initial coin offerings are on fire. Known as ICOs for short, they differ from venture capital and crowdfunding as a way for young companies to raise money.

Coins, not equity, go on sale. Coin owners can use the coins to access the company’s services if and when it becomes available. In the meantime, if the coins are popular and attract a lot of buyers, their price can go up - sometimes by a lot. They’re then liquid enough to buy and sell on specialized exchanges.

So far this year, 130 ICOs have raised $2.7 billion. That’s an enormous amount of money. These offerings are now raising more funds for the cryptocurrency community than traditional venture capital rounds. Take a look at this chart...

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But the news isn’t all good. In July, the SEC said that non-utility tokens could be treated as securities in future ICO raises. The warning did nothing to slow the explosive growth of ICOs.

When China banned ICOs and shut down cryptocurrency exchanges, growth paused and prices fell. But within a week, they were rebounding strongly.

Classic signs of a bubble, right? Good news gets amplified. Bad news gets blown off... until the bad news utterly overwhelms the good news and bursts the bubble.

Is that what’s happening now?

Bad News Does Not a Bubble Make

There’s plenty of bad news and talk of bubbles going around these days.

Case in point: Bancor.

It raised $153 million in a matter of hours this past June. Like a lot of ICOs, its idea can move the needle... but only if it works.

Bancor’s technology creates Smart Token contracts that can serve as their own market makers, automatically providing so-called price discovery and liquidity to other coins.

Bancor’s technology has come under criticism - a big reason why its price has dropped more than 50% from its ICO price.

Is Bancor a scam or dud? Absolutely not.

The size of the opportunity it’s targeting is huge. Bancor’s team is more than credible, and the technology is complex enough to warrant a large fundraising effort.

Tezos, another blockchain-based smart contract company, has also attracted the wrong kind of publicity.

Its software formalizes the process of upgrading a blockchain protocol in order to avoid forks and mitigate power struggles within cryptocurrencies. Its ICO collected an eye-opening $232 million.

It’s another BIG idea - and one that is much needed. But its husband-and-wife co-founders are enmeshed in a spat with the foundation’s director, and accusations are flying in both directions. The optics are not good.

But, again, not something I’d call a scam or dud.

Listen, I’ve been a big believer in bitcoin, cryptocurrencies and blockchains for a long time. It’s another exciting form of early investing, where the upside is special. But I’m not naïve about the market either.

Most ICOs will struggle to succeed.

Like startups, ICOs raise money at a very early point, pre-revenue and often pre-product. Nobody is entirely sure how well the product will work. Even if it does work, nobody knows how it will be received or if it will generate sufficient demand.

That’s a lot of “ifs,” even for a seasoned early investor such as myself. So why bother?

The Self-Driving Car Analogy

Let me share with you how I look at ICOs and cryptocurrency investing.

One of the most exciting sectors I track is self-driving cars. Self-driving technology is advancing every day. It’s not a matter of if but when. It will also transform our transportation and delivery options.

It will literally reshape our cities, giving them a completely different look and feel. It will change how we take care of our children and parents.

We know it’s coming. We know its impact will be huge. We know that self-driving car companies with the right business models will be giving their early investors unbelievable gains.

But we see little present evidence of this. The reason is simple.

The infrastructure and legal environment is lagging behind.

I’m not complaining. As a startup investor, it’s a Goldilocks situation: a nearly fully developed technology that will take the world by storm but one that is now undervalued.

Even better, it’s being given short shrift because of societal obstacles that have little to do with self-driving technology itself.

Yep, that’s a sector I’d like to invest in... and the sooner the better.

I feel exactly the same way about ICOs and blockchain technology.

Their technology is making advances on a daily basis. What’s holding things up? A clunky infrastructure and lack of regulations.

Sound familiar?

The ICO companies of today are setting themselves up to dominate vast swaths of tomorrow’s industries.

Who will rule banking, cross-border and peer-to-peer payments, insurance, transportation, real estate, and a dozen other vast global markets? Cryptocurrency companies.

This is the game being played right now.

This technology is where self-driving technology was, oh, I’d say roughly three to five years ago. But I expect its impact to be more wide-ranging and profound. In time, it will change the way IT systems around the world are built.

With that said, it will probably happen later rather than sooner. Transformational change doesn’t happen overnight. A long-term outlook is required.

Blockchain technology risk is very real. Serious investors must do thorough research before making an investment decision.

But the risks are more than offset by the potential upside of ICOs.

And that is why so much money is now flooding into them.

Short-term zigs and zags are just part of the journey. At Early Investing, we’re in this for the long haul. And we feel very privileged to be in a position to feed our members the “best of the best” cryptocurrency opportunities.

Good investing,

Andy

Thoughts on this article? Leave a comment below.

A Cryptocurrency Recommendation From the Experts

When he’s not contributing to Investment U, Andy runs the First Stage Investor service, along with his co-founder Adam Sharp.

This unique research service maintains a diversified cryptocurrency portfolio. One of their latest additions to this portfolio is Bitcoin Cash (BCC). Here are Andy and Adam checking on the coin back in September...

New cryptocurrencies, all with their own unique traits, continue to emerge, and they’re growing fast.

This month’s recommendation, Bitcoin Cash, is no exception.

Bitcoin Cash (or “Bcash”) is a spinoff of the original bitcoin and represents a fork in the road for cryptocurrencies.

It’s essentially a clone of the entire bitcoin network that split off and changed certain rules. These rule changes could make Bcash transactions faster and cheaper than bitcoin transactions.

Everyone who owned bitcoin on July 31, 2017, received an equal number of Bcash coins. This is due to the fact that Bcash shared bitcoin’s history up until midnight on July 31.

It is important to note that I do not believe Bcash is a major threat to bitcoin at this time. Bitcoin has a famous brand, top-of-the-line security and the largest network effect.

However, there’s a small chance that Bcash could take off due to its lower transaction fees. It costs $7 to send bitcoin but only an average of $0.50 to send Bcash.

The original bitcoin network is now working to fix its high-fee problem, but so far there’s been a lot of infighting and little progress.

For this reason, I believe it’s prudent to hedge our bitcoin exposure (which accounts for 50% of our cryptocurrency portfolio) with a small amount of Bcash.

Here’s the specific action to take...

If you’ve taken advantage of our current cryptocurrency recommendations...

' Move a quarter of your Litecoin holdings into Bcash. Litecoin currently makes up 20% of our portfolio, so I’m recommending that you either...

Sell a quarter of your Litecoin and buy Bcash with the proceeds

Or simply add a 5% position to add Bcash to your portfolio.

- Samuel Taube with Adam Sharp and Andy Gordon

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