They\u2019re going in with eyes wide open. For Liu, who put together some of China\u2019s biggest tech deals in his old job, the chance to shape the nascent arena outweighs the dangers of a market crash or crackdown. Loosely akin to IPOs,\u00a0ICOs have raised millions from investors hoping to get in early on the next bitcoin or ether, and their unchecked growth over the past year is such that they\u2019ve drawn comparisons to the first ill-fated dot-com boom.\u00a0Yet with stratospheric\u00a0 bonuses largely a thing of the past, the allure of an incandescent new arena far from financial red-tape has proven irresistible to some.<\/p>\n
\u201cTraditional investment banks and VCs need to monitor this space closely, it could become very big,\u201d said the 30-year-old partner at $50 million hedge fund FBG Capital, which has backed about 20 ICOs.\u00a0He\u2019s off to a quick start, getting in on this year\u2019s largest sale: Tezos, a smart contracts platform that raised $200 million to outstrip the average Hong Kong IPO size this year of around $31 million.<\/p>\n
\u201cUnlike the traditional financial sector, there are no ceilings or barriers. There\u2019s so much to imagine,\u201d he said.<\/p>\n
Critics say many ICOs are built on little more than hyperactive imaginations.\u00a0A cross between crowdfunding and an initial public offering, they involve the sale of virtual coins mostly based on the ethereum blockchain, similar to the technology that underpins bitcoin. But unlike a traditional IPO in which buyers get shares, getting behind a startup\u2019s ICO nets you virtual tokens — like mini-cryptocurrencies — unique to the issuing\u00a0company or its network. That means they grow in value only if the startup\u2019s business or network proves viable, attracting more people and boosting liquidity.<\/p>\n
That\u2019s a big if, and the sheer profusion of untested concepts has spurred talk of a bubble.\u00a0The US Securities and Exchange Commission signaled greater scrutiny of the red-hot sector when it warned on Tuesday that ICOs may be considered securities, though it stopped short of suggesting a broader clampdown. The regulator however did reaffirm its focus on protecting investors: part of the appeal of ICOs lies in the fact that – for now – anyone with a bold idea can raise money from anybody.<\/p>\n
At least 90 ICOs have taken place this year, raising more than $1 billion based on proposals from free wi-fi sharing to trading software without a single line of code.\u00a0It\u2019s already exceeded early-stage venture capital financing.\u00a0With little more than an explanation of the ad-lite browser it envisioned, Brendan Eich\u2019s Brave Software scored $35 million for its Basic Attention Token sale in under a minute in May.<\/p>\n
\u201cThese ICOs are not selling shares, which means their investors will have to count on the promise and reliability of the founders,\u201d said Beijing-based Chandler Guo, a bitcoin miner and angel investor who\u2019s helped more than 20 ICOs list on cryptocurrency exchanges. So \u201cI don\u2019t invest in any projects unless I know where they live and their mother lives.\u201d<\/p>\n
Justin Short,\u00a0who created electronic trading algorithms for Bank of America Corp. before launching trading-related startup Nous, is preparing to launch his own sale of digital tokens to bankroll what he calls cryptoasset portfolio management.\u00a0A former Wall Street floor trader, he likens the advent of ICOs to an episode half a billion years ago when many of the planet\u2019s life forms came into existence.<\/p>\n
\u201cIt\u2019s a Cambrian explosion of ideas. But that means you have to put in your work to figure out which one is even likely to work,\u201d he said.<\/p>\n
Cryptocoins bypass middlemen such as fee-absorbing banks and venture capital firms, and offer access to fast money.\u00a0But that also means traditional checks and balances are absent. The key may be to recognize which tokens serve an essential purpose to the selling startup\u2019s network, and thus will appreciate in value alongside rising adoption.<\/p>\n
Former HSBC forex-trading architect\u00a0Hugh Madden, currently chief technology officer of Hong Kong-based ANX International, this month helped raise about $18.7 million for cryptocurrency exchange OAX. He likens ICO-token ownership to a football club membership. You don\u2019t get special access but as the team gets better, more people become fans and the price goes up.<\/p>\n
When a football club \u201cbuilds more relationships with other clubs, gets more matches, and generally enjoys wider adoption, then more people want to be a part of it,\u201d the 40-year-old said. \u201cThere is no limit to participants, but there is a limit to memberships that allow members to exert influence on the future direction of the club.\u201d<\/p>\n
With ICOs however, the true price of membership can be impossible to gauge. Prominent bitcoin developers including Peter Todd have pointed to coding flaws in projects.<\/p>\n
Trading platform CoinDash said hackers made off with $7 million during its ICO just this month.\u00a0Hackers made off with nearly $40 million last week, stealing ICO funds from CoinDash, Swarm City, \u00e6ternity, and others. And a significant number of ICOs have been underpinned by mere protocols – operational frameworks with standard processes minus a business model.<\/p>\n
\u201cIt\u2019s very hard to value a protocol,\u201d said Gavin Yeung, a former Hong Kong-based trader at Deutsche Bank AG who\u2019s weighing an ICO for his cryptocurrency index trading platform Cryptomover.<\/p>\n
\u201cThe protocol only becomes valuable if the number of users increase exponentially on the network, so unless these protocols have substantial users or awareness, these projects could end up with zero value.\u201d<\/p>\n
The rush of speculators and get-rich-quick schemes in the space has both Yeung and Madden expecting more regulatory scrutiny. But the challenge is ICOs aren\u2019t confined by geography. For example, OAX\u2019s token attracted 4,400 backers across a dozen jurisdictions from China to Russia and the US.<\/p>\n
\u201cIt\u2019s very hard for regulators to have an isolated policy response that\u2019s happening on a global cross-border basis,\u201d Madden said.<\/p>\n
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