Markets have a purpose! And that purpose is to pipeline capital from those who have it (investors) to those who need it (industry/ enterprise). That is why we have markets. The secondary market is of course to provide an exit (liquidity) to those who want to sell their investments later.
Sometimes, the "noise" about markets makes us forget why these things exist. And then there are events which make you miss the point, too. Like Initial Coin Offerings or ICOs for short.
So, when Softbank’s Japenese telecom unit IPO-ed we kind of knew WHY. With the funds raised, the group will pay down some debt: reducing its leverage, increasing its EPS and possibly increasing enterprise value. Some of the money will go to fund innovations that Chief Executive Masayoshi Son thinks will change the world of technology.
Now you can agree or disagree with those strategies and causes; and accordingly choose to invest or not. But – there IS a WHY. (Post the IPO there was a sell-off indicating that investors thought poorly of the company’s future prospects (look at this). But – there was a WHY to the IPO.)
Where is the money from an Initial Coin Offering going to go? You have to wonder, if you want to see your money again. Not asking the correct set of questions when putting out money into investments is asking for trouble.
The issuer of the new “coin” is exchanging dollars for the coin. It knows what it is going to do with dollars. Do you know what you are going to do with those “coins”?
Investors piled into ICOs nevertheless raising over US$ 7.6 billion in 2018 for the issuers! (The research-minded can go here.) We go back to the question: to do what with that money? Very little, it would seem! Getting hands on your money is a goal in itself- do not forget!
Research into the WHY of an ICO yields little information. Much is written about how investors hope that the coin will increase in value. And we all know “hope” is not a good reason to invest.
The SEC held in Mid-2017 that crytpocurrencies are securities and need registration and other compliances. To enforce this the SEC has also taken action against unregistered ICOs. Two of them, CarrierEQ/ (Airfox) and Paragon raised $15 million and $12 million respectively. Both were asked to refund investors, pay penalties of $250,000 and become compliant. (If you want to know more about the regulatory action look here.)
New York is the only place in the world where coin issuances explicitly require prior approval. The bitlicense framework can be reviewed here by those who can wade through legal stuff- it is not for weak-hearted!
What is the moral of the story? Since this is not about investment advice, the focus has to be something else!
And that is – when looking at a business process, it is necessary to go to the fundamentals of what we are trying to build. It needs to fit within a business logic and commonsense. A sensible professional will try to understand everything in terms of what we know about how the world works.
No matter how slick and cool tech platforms become, if you want to eat pizza, you need physical delivery at your door!