Identifying successful startups amid the dozens of initial coin offerings taking place each week may be easier that it appears.
"The long-term winners are going to be the ones who have a mission that can only be accomplished by issuing a token," billionaire venture capitalist Tim Draper said in an email. "The tokens that spread the widest or have the most loyal following will do the best, regardless of how much they raise."
Even so, following the money can prove to be insightful. The 10 largest completed ICOs, including Tezos, Filecoin, Bancor, Status and TenX, have managed to grab about $1 billion of the more than $2 billion raised by sellers ranging from entrepreneurs to thieves, according to CoinSchedule data.
What most of the successful ones have in common is a focus on technologies needed to build blockchains, promising to revolutionize everything from supply chains to the world of finance with the digital ledgers.
"A lot of these are not johnny-come-lately," Nolan Bauerle, director of research at CoinDesk, said in a phone interview. "It’s got to be a great idea, but a lot of these great ideas are from people who’ve been working on this for a while now."
Work on Tezos, for example, started in 2014, the same year the first white paper on Filecoin came out. Many of the so-called whale ICOs also have renowned advisers or investors: Draper is backing Tezos and Bancor, which helps anyone easily issue tokens. Bernard Lietaer, one of the architects of the euro, works with Bancor.
The whale ICO club is becoming bigger even amid the frenzy that has brought increased regulatory scrutiny. Filecoin, whose fundraiser just ended, has netted $206 million, while EOS had raised $185 million in the first five days of its campaign, started in June. Kik Interactive expects to raise $125 million in September.
Thousands of investors have poured funds into the whales. Messaging and payments provider Status, for example, had 24,000 people invest in a sale that raised $90 million. Tezos, which has developed its own, secure blockchain infrastructure, sent its tokens into more than 30,000 wallets after the sale, which netted $232 million, the company said.
To do an initial coin offering, entrepreneurs typically post a white paper online, outlining their idea, and then offer supporters the opportunity to buy tokens -- typically with a cryptocurrency like bitcoin -- to finance the project. The tokens can trade on online exchanges, where some of the market values have swelled to beyond $1 billion.
The relative ease of doing an ICO has let to multiple scams, with many issuers simply copying the offering documents of a successful ICOs, such as Tezos. In August, the Securities and Exchange Commission warned investors to watch out for scams involving ICOs, a sentiment echoed by the Financial Industry Regulatory Authority. China banned the practice this week.
Not only scammers, but also hackers can wreak havoc on an ICO. Back in 2016, a project called the DAO raised hundreds of millions before falling prey to hackers. Some ICOs get canceled, or end up refunding investors their money.
That’s why investors might have jumped on Filecoin, which made its tokens only available to accredited investors -- those with high income or net worth.
"The vast majority of companies doing ICOs will not be successful," said Alex Tapscott, chief executive of NextBlock Global Ltd., which helps startups it invests in with ICOs. "There will be a reckoning at some point."
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