- 204 ICOs have returned 1,320% in 2017
- Celebrities endorsing ICOs have been warned the schemes could be illegal
- We spent a week following an ICO launch from a home office in Tasmania
DentaCoin. InsaneCoin. Lust. PowerLedger.
Just about the easiest brief in finance journalism right now is “let’s compile a list of the craziest ICOs”.
A senior writer here calls it all #LoseALotofCoin, and you don’t have to Google too far to know he has a strong case.
An ICO, if you still don’t know or are trying to block it out until it all goes away, is an Initial Coin Offering.
If you have heard about ICOs, but haven’t paid a lot of attention, you’d think it was just the cryptocurrency craze from 2013 back with a vengeance. Buy a couple of grands worth of the latest currency, hope it hits Bitcoin-like levels, then do… something with it. Or, from a founder’s point of view, as Adam Button described it on ForexLive:
“You just invent a token with no underlying assets that also conveys no ownership interest and sell it to suckers.”
Let’s hope not. If that were the case, there’s more than $US2.1 billion waiting to go down the drain, because that’s how much companies trying to launch applications based on blockchain technology have raised from ICOs in 2017. Conventional venture capitalists have only chipped in a paltry $650 million for the same sector.
That kind of boom has the US corporate regulator worried, especially given the prevalence of the biggest ICOs to be tied to some form of celebrity endorsement. Boxer Floyd Mayweather, Paris Hilton, and DJ Khaled have all recently used social media to promote ICOs, and the SEC has warned them the schemes they’re promoting could be illegal.
But that $US2.1 billion across 204 ICOs in 2017 has been far from a losing bet. In fact, if you’d sunk €10,000 into all of them, including the ones that failed, you’d have about €132,000 in your pocket right now. Michael Jackson, the former COO of Skype and partner at Mangrove Capital, authored a report that worked it out.
The money raised from the sale of the digital coins has funded startups, and the coins – which, in the solid ICOs, can be used to buy, sell and trade the services and products offered by the startups – have increased in value. If the startup has been managed correctly.
Plenty haven’t and many, many won’t. You only need to look at this mindblowing list of upcoming launches to see what kind of a Wild West it is out there right now. The rush is well and truly on.
Hackernoon has been watching closely and notes that in June, 92% of ICOs hit more than 75% of their fundraising goals. By September, that had dropped to 34%.
Failure to hit your goal doesn’t necessarily mean it’s game over, though, as most attempts at an ICO raise some development money, even if the tokens are worthless to the investor. But Hackernoon also notes that the median capital raised from failed ICOs has dropped from $US4 million in July to 43% raising $US1 million or less in September.
It’s as nerve-wracking as it is fascinating. And as PR release after PR release piled up in my inbox, choosing which pending ICO to reach out to has become a daily re-evaluation task.
But then I stumbled across an ICO happening almost right in my backyard.
Not just your average planet CEO
This is David Dobson, a regular guy standing in front of his lovely regular house in Launceston, Tasmania:
Well, he’s not so regular. Our kids were in the same class a couple of years ago, and while we waited after school together he’d tell me stories about his unusual occupation.
Basically, David is the CEO of a planet. A virtual one, Arkadia, in an MMO virtual universe known as Entropia.
Entropia made headlines several times in the late 2000s after players made huge sales for virtual objects, including a club which traded hands for $US635,000 real monies in 2010.
David’s planet, Arkadia, has a treasure-hunting theme. Kit yourself out properly and take it seriously, and you could find serious chunks of money. Real money.
I thought it was amazing and promised we’d chat about it further but our kids were split up and blah, such is the nature of schoolmate parenting friendships.
By the time we caught up again, ICOs were a thing. In fact, they were the first thing I mentioned to David, because this was Launceston and chances to let off some steam about crypto nutjobs just don’t come along. So, what did he think about it all?
“Actually, we’re looking at launching one in December,” he replied.
Of course he was. David and all the Entropians had been trading digital currencies for 14 years. In fact, David’s planet had been selling virtual land deeds for $5 which returned a percentage of Arkadia’s income to the buyer since 2014.
But in the two years since our kids parted ways, he’d started a new project – GameTester.
It’s a platform where aspiring game developers pay to have their games tested by a handpicked audience, which in turn get some kind of reward for mucking about and giving their feedback.
Hardly original, but successful – David, who holds a Masters in Entrepreneurship and Innovation, has 15,000 gametesters on his books.
They get paid in a variety of ways, such as a cut-price version of the game when it’s finished and released, or credits to spend on gaming accessories and computers at GameTester’s online store. David gets paid by game developers, game developers get feedback on their games, and gamers basically get paid for playing games.
It’s building nicely, but David wants it to grow faster. The perfect scenario would see GameTester actually being able to pay developers the full price of a build, and host and sell entire games on the platform, ideally in a better way than Steam does for its 125 million users.
And have an entire ecosystem of 1 million-plus gamers not feeling any great desire to leave the platform, because a) the games are excellent and b) the rewards for playing them on GameTester add up much quicker, like Frequent Flyer points.
And since David’s 15,000 game testers are already trading rewards, the success of ICOs suddenly means it makes sense to put a value on those rewards. Like this:
The best reason it makes sense is that the more money raised by the GTCoin ICO, the more chance GameTester has of attracting game developers to its platform, using the capital to fund workshops, office space, mentoring, equipment – anything that helps someone turn their game idea into a reality.
And obviously, the more – and better quality – games that are on the platform, the more accounts are registered and the bigger warchest GameTester has with which to build out its ecosystem of games, gamers, online shop stock, services and servers.
As it can be broken down for microtransactions, a cryptocurrency is invaluable for gamers who buy in-game items. Another idea David is kicking around is paying developers for access to game levels as they’re being designed.
Like buying A Song of Ice and Fire, but ideally without the six-year waits between instalments.
And that is what’s attractive about an ICO to David. It’s funding tailored to the investor.
“It works to have gamers aligned with the success of the platform,” he says. “When the platform does what is best for gamers then the value of the coin rises.
“VCs are focused on the financials, i.e. making the most profit from the company, whereas the ICO allows us to focus on the value of the coins rather than keeping a VC happy.”
Flexible risk, random reward
Yes, there is a chance a single GTCoin will be worth 100 times as much after the float, but if it is, it’s hopefully because investors believe their money is being spent on a business with growth potential run by people who know what they’re doing.
So is it a responsible way to raise money? To be honest, probably not, given anyone can start an ICO while having to meet virtually no regulatory requirements. Right now in Australia, the closest we’ve come to that is a guidance paper.
But it’s not illegal, and it’s an easy option for smaller investors (say, millennials) wanting to throw a thousand dollars at a startup, when they have little or no chance of having the cash on hand or connections to get in on a lucrative IPO.
They might be tired sick of earning 0-1% interest on their savings, or maybe made a ton of BTC somewhere and are hedging some it around a bit.
Or they just don’t want to dump $1.5 million on a house in Sydney, which is an enormous, lifelong investment, and one only a fool would believe is 100% foolproof.
Yes, an ICO investment is a risk. If you don’t believe that, here’s Australian Securities & Investment Commission commissioner John Price, just over a month ago:
“ICOs are highly speculative investments, are mostly unregulated and the chance of losing your investment is high.”
But is it any more dangerous than laying down $400 for a high-res audio player on Kickstarter without knowing if Neil Young will get bored and kill it off less than two years later?
There’s another big attraction in ICO, for those launching one – speed. I spoke to David about this less than two weeks ago. At the time, he said they were aiming to get a presale in the works “around the start of December”.
I told him I hoped for his sake that ICOs were still a) in vogue and b) still legal by December, and mentioned something about “the crest of a wave” appearing rapidly with all the media saturation ICOs were getting. And anyhoo, all the best, sounds really interesting and yes, I’d be keen to follow GTCoin over the next month or two and it all sounds like a good story for BI.
Within 24 hours, the GTCoin ICO presale was in motion, apparently – and a bit alarmingly – sparked by my surfing analogy. David’s global team agreed there was no time to waste and had brought their presale launch forward to – well, a couple of days ago. I didn’t even get time to write a story.
- The website materialised, with infographics and everything.
- The all-important white paper was released, which gives investors all the information they need to know about where their money will be spent, and who will be managing it; and
- A video, with business development manager Dylan Cock drawing the short straw to explain what the coin is all about:
David also gave me access to a progress tracker, which is the most interesting and refreshed page in my bookmarks this week, although I’m not allowed to show it publicly. What I can say is it’s interesting because watching the pledges flow in has been an eye-opener, to say the least.
“Early indications suggest an average of approx $1000 per buyer,” David says, adding that the most impressive statistic for him wasn’t how much they’re raising as it was how low the overheads were to get investors to gather round.
“It’s tracking around a $1 advertising spend for every $50 we’re getting back. And we’d be comfortable right now ramping our advertising spend up 10x, so it’s pretty impressive to think about the potential we have to grow, even at this early stage.”
Most importantly, the team worked around the clock to build a secure – and flexible – wallet:
I bought a small amount to check whether the process was as easy as the team said it would be, so here’s my disclaimer – the reporter is now an investor in GTCoin, albeit it for investigative purposes only.
I’ve used more crypto wallets in the past couple of years than most. Nine, in fact, and only one of them – Blockchain.info – was as smooth as this. The eight other have collapsed, been sold out, or seized by US officials.
I’ve also been burnt trying to get into BTC mining. Rest assured I won’t be banking my kids’ education on making a GTCoin fortune.
The GTCoin team last week spent a night randomly testing ICO wallets and found them universally awful. That’s a sure sign that the vast majority of ICOs are hit and hope enterprises.
“Just in random testing we found several which allowed us to deposit funds, but then wouldn’t let us do anything with them,” David says.
“You couldn’t withdraw again, you could buy Bitcoin. They simply locked it up.”
Which was surprising, because it’s not that difficult to build a wallet system on the Ethereum blockchain which is easy to use, and flexible. It’s why Ethereum is so popular.
And that’s it – you’re away. GTCoin is not even close to a headline act in the current world of ICOs, but there’s $700K in their coffers in less than a week from the pre-sale alone.
A couple of years back, a couple of million from a VC for a tech startup which looked like bricks-and-mortar compared to an ICO had analysts and journalists shaking their head at the madness:
Three million! Just like that!
In July this year, in the same amount of time – 13 days – self-amending cryptoledger Tezos raised $US232 million.
Back in 2013, it took another 18 months following its $3 million round for Nomi to raise $13 million in total, after which it was bought out by Brickstream.
But just three months after its ICO, Tezos saw December futures on its tokens plunge 58% as progress seemed to grind to a halt on actually creating the tokens.
The premise of the ICO was to raise money to create a better blockchain.
David says the size of the raise was not surprising, given the lofty goal. But that makes it proportionately risky for investors.
His team has a goal of $20 million raised in the presale, which – and it’s a sign of where ICOs are at that it’s comfortable to write this – is comparatively modest. The thing that makes it easier to invest in an ICO like GTCoin as opposed to Tezos is even if your coin doesn’t grow in value, it’s still worth something on GameTester.
So if it flatlines, investors can buy themselves a comfy gaming chair and walk away.
It’s a notion you’ll find in any online guide to how to choose your ICO – are you buying into the coin, or are you buying into what the coin buys? PowerLedger, the Aussie ICO which recently raised $34 million, fits neatly into both.
Like any suite of investments, there’s an infinite range of what kind and level of risk you’d like to take.
But for some time yet, investing in an ICO will be a brave step for most people. Raise the topic at the pub and see how many around say “I don’t get it”.
“The average buyer of GTCoins is someone who is forward thinking and willing to get involved in something new,” David says. “It’s the kind of people who are early adopters of new technologies.
“Without an ICO we’d have grown either organically or via VC funding, but the ICO is the much preferred method to grow rapidly.
“We know many investors will be gamers themselves, but this process also introduces the platform to a broad market.”