Will ICOs Prevail? Give Them Five Years

(Bloomberg Opinion) -- Ernst & Young recently published a damning analysis of 2017’s initial coin offerings. The odd thing is it concentrates on the financial performance of the cryptocurrency market’s equivalent to an initial public offering in the mainstream investment world since the end of 2017. That does not reflect on the competence and sincerity of their promoters, nor the viability of the business and technical enterprises.

It’s fair for E&Y to point to ICOs’ blemished track records. Many were frauds or incoherent or unrealistic, and all were overhyped in 2017. Many are moribund, some returned money to investors, and others have gone radio silent.

But the large majority of dollars invested were in projects that remain viable. Overall success levels compare favorably to conventional software development projects and early-stage ventures, especially in light of severe funding problems caused by fickle investor enthusiasm. During the cryptocurrency bubble, too many ideas were given too much money too early with too little oversight, and too many fraudsters and delusionary optimists were attracted. Afterwards even valuable projects struggle to get the relatively few dollars necessary to push them over the finish line.

It will be at least five years before we can evaluate the 2017 ICOs fairly. At that time we’ll ask two questions: Did the project result in a viable, useful technology? Were ICO investors rewarded appropriately via appreciation of their tokens? Those questions matter, not how much investors bid the prices up and down prior to success. (Full disclosure: I have stakes in several coins mentioned in this commentary.) 

E&Y complains that 2017 ICOs lost 66 percent of their value over 2018. All that tells us is there was a bubble in crypto prices around the end of 2017. Consider Tezos. It raised $232 million in July 2017 at a price of 42.5 cents, and now sells for $1.41, a 231 percent return. But during the bubble it got as high as $10.56, so it has lost 86 percent in 2018. But that’s irrelevant.

Investors have a right to ask whether the $232 million actually received for Tezos development was well spent. No one has a right to complain that after the issue some bullish investors unrelated to Tezos bid the price up and couldn’t keep it at those levels. E&Y lists Tezos as “below its listing price,” because E&Y counts from Oct. 2, 2017, when Tezos first appeared on major exchanges trading at $1.66. But the relevant question is how it trades today relative to its initial offering price of 42.5 cents.

The entire crypto market is down about 66 percent this year. That’s ICOs along with cryptocurrencies and other cryptoassets. This has nothing to do with how good an ICO idea is, how honest and competent the people spending the ICO proceeds are, nor how much technical progress has been made implementing the idea. It says more about investors than about crypto.

E&Y’s other big complaint is 71 percent of ICO projects remain just “ideas.” For financial performance, ICOs are weighted by dollars, meaning only the big ones matter. But E&Y has switched the measure and is now talking about number of ICOs. Those statistics are dominated by small ones, for which information is difficult to gather.

The 10 ICOs of 2017 that raised more than $50 million represent over a third of all dollars raised. Four coins — Filecoin, Polkadot, Status and Qash — targeted 2019 launches at ICO time. All have released demo or beta test versions, or have partial functionality. Another three — Bancor, Kin and WAX — launched in 2017. Tezos launched in September 2018, and the remaining two — Sirin and TenX — have promised 2018 launches. So where we can easily track progress, it’s pretty good (again compared to traditional major IT projects and early stage ventures), and where we can’t track it, it’s anyone’s guess, but skepticism about most is warranted.

I don’t claim every ICO project is on schedule. All of the 10 above, and most of the rest, have had setbacks. Some targets have been pushed back and some promises have been scaled back. Governance squabbles, hacking, regulatory issues and misinformation continue to plague projects. Ideas that worked together elegantly in white papers have sometimes proven to conflict in real code. Usage rates have generally been disappointing.

But these are all expected problems with bold innovations and most ICOs are innovation triple threats: They push the envelope on technical issues, they represent a novel form of project organization and they raise capital using an untested model. Overall, at least looking at the biggest ICOs and also smaller ones with the most solid foundations, progress has been better than reasonable expectations at the time of issuance. For the ICOs that were both smaller and less solid, reliable aggregate information is hard to come by, but it’s probably fair to write the large majority off.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Aaron Brown is a former Managing Director and Head of Financial Market Research at AQR Capital Management. He is the author of "The Poker Face of Wall Street." He may have a stake in the areas he writes about.

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