The Appeal of Crypto Project Investment

Why is it that crypto projects became so attractive for investors? It seems that today everyone has heard of blockchains, cryptocurrency, crypto mining, and Bitcoin is literally a household name. The hype created around the price of Bitcoin, rising almost 2000% from $1K in January 2017 to more than $19K at its peak in December 2017, has boggled the minds of many. Now people have realised that ICOs are the next big thing that has rivaled Venture Capital investment. Many predict it to be the new, and possibly the most popular way, the majority of projects and startups will be invested into.

Cryptocurrency and ICOs in general, as a type of fundraising method, makes sense for a lot of reasons, one being that the average time for a startup to receive VC investment can take more than 3 months at the least. If they’re lucky to gather all the paperwork necessary, which doesn’t always happen as many projects have been stuck in the tedious bureaucratic cycle never to be seen again. Take into account the time needed to settle all related legal procedures and it’ll be several months before anything happens.

The VC startup funding hit it’s peak record in 2017 with a total $164B globally, according to a new MoneyTree Report from PricewaterhouseCoopers LLP (PwC) and CB Insights. The numbers provided are simply mind blowing, to say the least, especially if you compare them to the $3.7B invested via ICOs. Here’s another fun fact, in 2016 the amount ICOs raised was a meager $96.4M, which means that the number of capital raised via ICO has increased 38 times in just one year. This is staggering considering that the level of public trust towards them has not been great, to say the least. Although predictions vary from expert to expert regarding how will token sales affect the market in 2018, none of them can argue that these numbers will keep growing exponentially.

Another reason is that ICOs are a lower risk investment as you contribute what you can afford to lose. While VC is more about making profit in the long run and less about the support of new innovative ideas that have a risk of not proving as viable as predicted. So naturally not every investor feels like pouring funds into a concept that may prove to be less profitable if at all. Thus many startups tend to go the ICO route where they have a lot more chances of getting the necessary funds without getting involved with tons of unnecessary paperwork while also bypassing the geographical unpopularity among investors that may plague that part of the world.

Despite there being so many scams, money laundry and generally having huge amounts of unregulated money flowing past any regulatory institution, public perception of cryptocurrencies and their related projects has been somewhat negative. In 2017 China and South Korea outright banned ICOs while the US ruled that certain crypto assets should be classified as securities and ICOs should be regulated accordingly, with SEC stating at a senate hearing on February 6 2018, that all ICOs will be met with tighter regulations, while true cryptocurrencies will be embraced with smart policies.

Over the course of this year, other jurisdictions are very likely to follow suit. In 2018 the UK Treasury is set to regulate cryptocurrencies in line with anti-money laundering and counter-terrorism rules forcing traders to reveal their identities in certain cases. That said, this could drastically change the game as these regulations will try to eliminate the various problems plaguing ICOs, like whaling. The term “whale” is used to describe the big money Bitcoin players that show their influence on the Bitcoin market. A good example being the BAT ICO, which was over in just 24 seconds and raised $35M with almost a quarter of the BAT tokens being owned by one person who eliminated any chances for the other people to participate in the ICO at all.

In August last year Estonia viewed a possibility of creating its own cryptocurrency called ‘estcoin’, as reported by Reuters, that was supposed to be a “community” token to support e-Residency program to further develop the country’s economy by letting anyone establish a remote business in Estonia without needing to visit the country. Although in December Estonia’s central bank said that estcoin was not a government initiative and no further statements were made, this is still a good sign that not all governments are shying away from the potential seen in cryptocurrency and blockchain technologies. Venezuela and Sweden already considering of introducing their own crypto. While Japan – arguably one the most progressive countries in the world – has fully embraced the new crypto trend by allowing “virtual currencies” as a legal form of payment and obliged all exchanges to obtain the mandatory licensing as a payment institution in Japan. With MUFG (Mitsubishi UFJ Financial Group, Inc.), the largest bank in Japan and the fourth largest in the world, announcing plans to launch its own cryptocurrency exchange, a pegged cryptocurrency and bitcoin segregated accounts for clients of other exchanges.

Although many believe that government's involvement in the cryptocurrency space will slow down the ICO investment market drastically, others believe that it was not only inevitable, but also a necessary step in bringing cryptocurrency investment up to par with other traditional investment methods. Despite some investors getting scared off most of them this year will get involved with this new means of funding, seeing its true potential. They will most likely demand further business validation and transparency, making it increasingly difficult to raise capital having nothing but a white paper making the quality of future ICOs better while in all probability reducing their quantity. Here’s where Escrow comes in as a means of providing the necessary obligations stipulated by the projects white paper and ToS giving a much needed mechanism of refunding in case the project fails to deliver its promises. Currently there are several companies that specifically specialize in acting as an escrow agent with the most prominent and reputable being Escrow.com and Transpact.com just to name a few.

In summary ICOs are not an ideal solution for every business , but they remove the barriers between investors and entrepreneurs from neglected geographies with opportunities of investing into innovative ideas that would traditionally be ignored by VC. Although right now ICOs are not quite the equitable funding solution that will topple down the Venture Capital empire, at least not yet. Nonetheless, in 2018 we’re likely going to see new currencies and platforms, while investors, financial institutions and governments will step up to shape the market with new regulations, solidifying cryptocurrencies in the traditional financial system.

John Ganchak