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Initial Coin Offerings? Millions Raised with the Click of a Mouse

Editorial General, Economic update 09 Feb 2018

by Mark Pesce, a leading futurist, author, entrepreneur and innovator.

Most people have heard about Bitcoin - it’s the oldest of all the cryptocurrencies, and (as of this writing) has the largest market capitalisation. But all cryptocurrencies are simply bits of computer code. Most often that code is ‘open source’ - meaning it can be publicly inspected, reviewed, and copied by anyone for any reason. The Bitcoin blockchain - the list of ledger entries showing who owns which Bitcoins - relies on tens of thousands of lines of computer code that can be used by anyone else, for any reason.

Not long after Bitcoin launched, several individuals had taken the Bitcoin source code, modified it slightly to suit their own purposes, and launched their own ‘alt-coins’. A few of these first alt-coins, such as Litecoin, have market capitalisations in the billions of dollars. One of them - Dogecoin - created in 2013 by an Australian programmer as a joke, has a market value of six hundred million dollars. Some joke!

The creators of Litecoin took the computer code from Bitcoin, prettied it up, and released that as open source. Most of the alt-coins available today - including Dogecoin - are actually based on Litecoin rather than Bitcoin. Litecoin code became the ‘printing press’ that gave rise to a hundreds of other alt-coins.

There’s another way to do this, pioneered by the creators of the Ethereum cryptocurrency. At the time of the Ethereum announcement, the creators asked interested parties to buy Ethereum using Bitcoin - trading an established cryptocurrency for a new one. This had two effects: it pegged the value of Ethereum to the value of Bitcoin, and it created a new funding mechanism for cryptocurrencies - the Initial Coin Offering, or ICO.

Rather than ginning up an alt-coin out of nothing but source code, an ICO demands that buyers stump up with real cryptocurrency assets, in return for which they receive some portion of the coins on offer. This sets a ‘strike price’ on the coins - analogous to the opening price of a publicly traded stock - and provides immediate liquidity to the folks behind the ICO.

This seems so similar to an Initial Public Offering of Shares that it eventually caught the attention of both the SEC and ASIC, both of whom have laid down some strict rules for the kinds of promises that can be made in an ICO. As it is not a public share offering, ICOs must clearly communicate to buyers that there is no investment, no ownership, nor any particular profit to be gained by buying into an ICO. We’ve seen ICOs get shut down for violating those rules.

For an ICO to be viable, it has to have some economically rational basis - why would people want to use this new coin? Why should anyone hand over cryptocurrency with market value in exchange for a new currency with no established value?

The story of Australia’s most successful ICO - Power Ledger - shows how an ICO should work. Power Ledger runs a service that allows homeowners to sell their solar electricity to their neighbors, a service that used to be prohibitively expensive because of all the accounting overhead. Power Ledger solved that problem using a blockchain to handle the accounting verifiably and transparently.

Power Ledger - David Martin (MD), Leigh Travers (Digital X CEO) and Dr Jemma Green (Founder) 

Last year, Power Ledger created POWR ‘tokens’ as accounting units to be used within their blockchain. People are now paying for their power using POWR ‘tokens’, and generators are paid for that energy using the same tokens.

During their ICO, Power Ledger raised $34 million dollars selling these tokens to the public. The ICO established the market value of the POWR token, and generated enough capital to grow Power Ledger for at least the next few years. Buyers understood the economic necessity of the POWR tokens - which now have a market capitalisation of over a quarter of a billion dollars.

Over the last six months of 2017, ICOs generated more than twenty billion dollars in startup funding -- just in the United States! The bottom has dropped out of the venture capital business, because startups can now go directly to the market with pitches for their own coins, rather than cap-in-hand to a VC. Many of these offerings wouldn’t pass a sniff test, but a few - like POWR - have real utility, and have created a lot of value.

This beautiful animation shows the incredible acceleration in ICOs over the last four years. As you can see, we’re just getting started.

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"Fascinating - time's are a changin'"

Derek Byrne 11:31 on 09 Feb 18

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