Paul Condra and Ria Bhutoria, research analysts at Credit Suisse, might be looking at Initial Coin Offerings (ICO) from an institutional standpoint and scratching their head. In a December 8 report they point to the top ten tokens issued being up a stunning 50,000% since inception. That is not a typo. While such oversized gains are typically dismissed out of hand, with cryptocurrencies gaining institutional traction of late, the researchers decided to dig in deep and offer their clients an ICO Primer that explains key points behind how the hot topic de jour works.
Initial Coin Offerings: Top coin offerings significantly outpace the average
While the top end of the Initial Coin Offerings market has generated meaningful returns, it should be noted that the vast majority of offerings don’t come close to the top decile. To illustrate the point, the top 33% of ICOs are up 4000% since their offering date, while the middle third are up only 560% while the bottom third are up just over 100%.
There is also significant survivorship bias is significant. Deadcoins.com, for instance, lists over 600 crypto-tokens that have failed, with failure rates increasing as of late.
Tokens, which is the output of the ICO, only represents 16% of daily trading volume, while bitcoin, ethereum and other “coins” represent 84% of the nearly $10 billion in daily trading volume.
ICO funding, which has been a boom, has cooled recently, however.
In the past two years, nearly 280 ICOs brought in close to $4 billion in funding, Credit Suisse estimates, eclipsing internet venture capital funding in 2017.
“While funding levels boomed through the summer and fall, November saw a sharp slowdown, which may be stemming from added regulatory scrutiny,” the report noted. Currently, regulation is scant and jurisdictions are unclear. “While the SEC has not issued ICO rules, it has said that tokens could be considered securities (if they pass the “Howey Test”), called out possible fraud and disclosure violations, and brought charges against two fraudulent ICOs.”
Initial Coin Offerings: Money goes to fund a startup
Where does the “money” go once an investor supports Initial Coin Offerings?
The investment, which typically is transacted in bitcoin or ethereum, is often used to fund a tech start-up that often use blockchain technology to provide a technology-based service.
Credit Suisse says the majority of funding, nearly 35%, has gone toward projects focused on building blockchain infrastructure. The second largest category, 32%, goes to financial-service related projects. The top ten categories tilt towards finance: Infrastructure, trading & investing, finance, payments, data storage, healthcare, gaming, gambling (which is like finance), commerce and marketing, identity and reputation.
Those issuing ICO, much like those obtaining venture capital funding, can issue a security, which is regulated as securities by the SEC and provides underlying ownership into the operation. Credit Suisse points to Protos Cryptocurrency Asset Management, which offered tokens representing an interest in the underlying hedge fund that paid off based on the fund’s performance.
Utility tokens, on the other hand, are not regulated by the SEC and are not marketed as an investment in any way. In some cases they can be used to purchase services, such as the example of Storj. Their utility tokens allowed users to receive file storage space on their network.
Credit Suisse estimates that less than 5% of ICOs are security tokens, but they expect this percentage to rise as ICO issuers and buyers seek more regulatory certainty.