Technological developments move very swiftly nowadays, but even compared to the typical rush, the surge in initial coin offerings (ICOs) has been remarkable. But almost as quickly, a corresponding boom in media coverage ranging from the critical to the purely analytical has followed. In the latest fintech research note from PitchBook, the ICO phenomenon is analyzed in depth, with its history, the mechanics of offerings and long-term viability addressed in turn.

Get our full guide on moat investing in PDF

Get the entire 10-part series on moat investing in PDF. Save it to your desktop, read it on your tablet, or email to your colleagues.

Asset Management Fees Fall For The First Time Since 2008

Key takeaways & highlights: 

  • As they eclipse $1 billion in total amount raised as of early July 2017, it is clear the alluring features of ICOs could result in them being more than just a recent fad
  • In the note, PitchBook analysts detail the mechanics of ICOs, tracing how they developed from the earliest protocols for peer-to-peer networks validated by the blockchain
  • Notable recent ICOs are profiled, along with detailed explanations of the concepts powering the offerings

A breakdown of initial coin offerings

Analysis of ICOs, their recent boom, and long-term viability


Launching Bitcoin, Satoshi Nakamoto’s pseudonymous 2009 paper mapped out a protocol for a peer-to-peer network to validate transactions on a shared public ledger known as the blockchain. For the first time, individuals could make payments online that bypassed traditional gatekeepers such as banks and processors. Building on Satoshi’s legacy and technology, entrepreneurs have begun to use derivative technology to bypass traditional capital markets institutions. Over the last few months, a new form of raising capital via issuing a blockchain-based token or coin has burst into the public consciousness. These are called ICOs (initial coin offerings) or token sales. Companies that may have traditionally gone to angel investors or VC firms for funding have another, unregulated option. Founding teams have raised tens and hundreds of millions of dollars on the backs of whitepapers describing their idea and outlining the design of their custom smart contract token built using blockchain technology. Research firm Smith & Crown has reported that companies have now raised over $1 billion via this method as of July 7. This is on pace to surpass all historical VC investment in the blockchain space by year end, which stands at $1.7 billion since 2010. In the eight years since the debut of Bitcoin, only Coinbase, Circle and 21 have raised more than $100 million from VC investors, all across multiple rounds of venture funding.

Much debate remains over the many legal and ethical issues raised by this practice. However, given limited rumblings of regulatory action and increasing sophistication of the crypto space, the phenomena will continue and likely accelerate through the back half of the year. Our view is that while many of these companies have the ability to take blockchain to a broader range of use cases, and that the lack of scrutiny has provided a great sandbox for innovation, this same lack of oversight and scrutiny from sophisticated institutions and regulators will lead to many failed projects and perhaps outright fraud. Given the historical volatility of cryptocurrencies, buyers of these tokens are in practice well aware of the risk of loss. However, the massive potential of
blockchain technology to transform many high-friction rentier business models is worth the risk.

What Is an ICO?

Entrepreneurs have turned to this new unregulated funding mechanism to sponsor an evolving range of blockchain-related projects. Building on the success of Bitcoin and the more recent Ethereum protocols, entrepreneurs have tried to replicate this success by building bespoke distributed protocols with their own features. Many of the first examples of what could be called ICOs were various flavors of Bitcoin knockoff cryptocurrencies with varying specs. With the advent of Ethereum, for the first time tokenized smart contracts could be designed to do more than just simple transactions. Many of these projects have taken the form of a distributed autonomous organization (DAO). The organizations automate certain aspects of decisionmaking by allowing stakeholders to exercise governance rights.

Many investors who generated a massive return from the increase in crypto prices have chosen to recycle their gains into the latest projects driven by fear of missing out. The mechanics of an ICO involve first setting up a website and whitepaper with information about the business model and founding team. Details in the whitepaper will include the problem the platform is trying to solve, management structure, plans for development and allocation of resources. Individuals deposit an established cryptocurrency such as Ethereum, Bitcoin, Waves or others and receive a private key (in the form of a cryptographic hash) for the new token(s). Since the token is new, it may take some time before wallet software supports the new digital asset.

Since “investments” in the US and other countries are heavily regulated, ICOs typically go out of their way to portray themselves as contributions and donations. The Ethereum foundation, which issued perhaps the most famous ICO in 2015, characterized the event as a “donation.” A recent legal analysis of token sales distributed by Coinbase referenced a certain definition of a security, which was established by the US Supreme Court case SEC v. Howey. The case created a Howey Test with three criteria to be met in order to be considered a security:

1. An investment of money

2. in a common enterprise

3. with an expectation of profits predominantly from the efforts of others.

The decentralized nature of the crypto ecosystem allows the industry to maximally leverage regulatory arbitrage in order to deter scrutiny of any legal basis. Many players take advantage of laws governing legal nonprofit associations in Switzerland, which allows them the same legal standing as established entities such as FIFA, the global governing body of association football (soccer). This has led to Switzerland becoming a hub for blockchain entrepreneurial activity. Under this guise, associations can form token-backed sub-entities in order to carry out development of specific crypto projects which aim to ultimately generate revenue. In fact, this has also led to the recently formed Crypto Valley Association formed in the canton of Zug.

Industry analysts have lumped in token sales and ICOs. In the former, entities issue a tradable token typically using the ERC20 standard which makes them compatible with other dapps (decentralized applications). The former include tradable token sales as well as other crowdsale projects facilitated using cryptocurrencies. Ethereum first enabled the development of smart contracts using its turing-complete architecture. Turingcomplete means that the Ethereum network acts as a distributed virtual machine with the ability to execute any application that a typical computer would using its distributed network. Some of the most successful token sales have utilized the Ethereum blockchain to execute their smart contract tokens.

Initial Coin Offerings


While there are still fortunes to be made in certain ICO-backed platforms, investors should be wary of the risks involved. Many projects may be unable to execute on their ambitious business models in spite of raising millions in funding. Further, many of the most

1, 2  - View Full Page