Bitcoin Buyer Beware

Entrepreneurs have a new trick to raise money quickly, and it all takes place online, free from the constraints of banks and regulators. As Axios reports, since the beginning of 2017, 65 startups have raised $522 million using initial coin offerings — trading a digital coin (essentially an investment in their company) for a digital currency, like Bitcoin or Ether.

One recent example, as NYT reports, saw Bay Area coders earn $35 million in less than 30 seconds during an online fund-raising event. They sold Basic Attention Tokens (BAT coin) which will grant buyers access to an innovative ad-free web browser the coders are intending to create, but have yet to launch.

And that's the catch: these investors are buying promises in the form of coins for a product or service that doesn't exist.

 

Similar to the Bay Area example, a group of entrepreneurs in Switzerland secured $100 million last week by selling a coin that will one day be used on Status, an online chat program that's still being developed.

 

Proponents argue that these initial coin offerings are "a financial innovation that empowers developers and gives early investors a chance to share in the profits of a successful new enterprise," NYT notes.

 

However, many say it potentially violates securities law and that this trading of digital currencies is ripe for hackers, from NYT: "Last year, the first blockbuster coin offering, the Decentralized Autonomous Organization, quickly raised more than $150 million. But the project blew up after a hacker manipulated the code and stole more than $50 million worth of digital currency."

By selling these coins for Bitcoin or Ether, "conventional banks and financial institutions are essentially shut out, allowing initial coin offerings to take place beyond the control of regulators," and that could lead to a whole host of issues for the entrepreneurs and investors alike.

So, it is no wonder that Fred Wilson's advice with regard ICOs is simple "buyer beware, do your homework, don't be greedy."

AVC.com's Fred Wilson has a lot more to say...

Whether you are buying in a private placement of securities as a venture capitalist or buying in an ICO as a crypto enthusiast, there are certain things that you need to be careful about. And right now, with all of the enthusiasm for crypto assets out there, I am very concerned that nobody is being careful about anything.

So here are some things to think about before placing your order on that next ICO:

  1. The amount raised matters, a lot. More money is not generally a good thing. I wrote a blog post about this a while back. In my experience, the startups that are careful and raise modest amounts of capital outperform the startups that raise crazy amounts of capital and are overly aggressive. I would look for capped ICOs and modest amounts of capital. Teams should raise enough money to do what they want to do but you can do a lot with $10mm and a tremendous amount with $50mm. Ethereum raised $18.5mm USD (in BTC) in their token offering and lost some of that due to a decline in BTC value. And look at what they have been able to accomplish with that funding.
  2. You should understand what the token that is being offered does and have some feel for how large of an opportunity that is. I remember friends buying hot Internet IPOs in the late 90s and I’d ask them why they were investing and they would say to me “I heard its a hot deal” and I would say “But what does the company do?” and they would say to me “I don’t know, but I know I’m going to make a lot of money.” That kind of investing is dumb. Be smart and understand what you are buying and why. And if you can’t hold the investment through to the point at which the token will have real utility and real value, you might want to think twice about buying it in the first place.
  3. Valuation matters. I know that many in startup land don’t really agree with this. There are VCs who want to be in the best deals and don’t really care what they have to pay to get into them. That might work as an investment strategy but it requires a lot of luck and market timing. If, instead, you focus on valuation when you make your investments and buy into investments at prices that make sense to you and have a model for why and how the investment will be worth 10x your entry price in 5+ years, you stand a much better chance at making solid returns. There are people in the crypto space who are building valuation models. You should follow them and understand their work. And you should try to apply that kind of thinking to your crypto investing.
  4. Avoid scams and things that feel like scams. Scams are not limited to the crypto sector. They exist in all forms of investing (and many other sectors too). As VCs we often get pitched an opportunity that has red flags all over it. You learn quickly to delete those emails and not return those calls. But an emerging sector, like crypto, where there is less regulation, scrutiny, due diligence, and knowledge, scams are going to be more common. There have already been a bunch of well publicized scams in the crypto sector and I would bet that one or more successfully funded ICOs that have already been done will turn out to have been a scam in some measure. There is a difference between a intentional scam and an accidental scam, but if you are the investor, you were scammed in both instances. Be on the lookout for scams and avoid them. The best red flag for a scam is lack of detail on the technology, how it will work, and a lack of credibility of the people behind the project. Do you homework on these investments and make sure the technology and the people are credible before you part with your money.
  5. Look for projects where the technology is well specified and is working in the wild. It is much easier as a VC to invest in companies where the product has been shipped and you can use it. I would venture to guess that more than 80% of USV’s investments over the years have been into companies where that was the case. You can use Bitcoin, you can use Ethereum, you can use Steem, you can use Zcash. These are fully functioning crypto assets that have been “shipped” and are widely used. That does not mean they will be successful, but it sure gives you more confidence that they might be successful. Investing on a white paper is way more risky than investing in a working technology that you can use yourself.
  6. Don’t be greedy. This goes for both buyers and sellers in the market. You might be able to make a killing right now. But I would suggest you resist that urge. Those who play this market right over the long term will do extremely well. But trying to make a killing overnight is always a bad idea. So for sellers that means raising reasonable amounts, not all you can get. And selling more into the market over time, as Vitalik suggests in this blog post:
    If we want to strike at the heart of this problem, how would we solve it? I would say the answer is simple: start moving to mechanisms other than single round sales. For the buyers, this means not putting all of your assets to work in one ICO, or even all of your assets into crypto. Markets can crash. You need diversification to manage risk, particularly in highly volatile markets.

I have been a big booster of Bitcoin, blockchain, crypto tokens, and the like on this blog for the past six years. I am a big long term believer in this sector. USV is investing in this sector. We are investors in token funds and I believe we will start directly buying tokens soon. So we are bullish on crypto.

However, there are many things going on in the sector right now that are head shakers to us. We have been investing in startups and emerging tech sectors for over thirty years. We have seen this movie before . We know how it plays out and we know that all is not up and to the right forever.

When people are afraid, be greedy. And when people are greedy, be afraid. We are much closer to the latter scenario in crypto right now and while I am not afraid for my investments and USV’s investments in this sector, I am afraid for the sector and those who are being the most greedy right now. I am cautioning our portfolio companies to tread carefully and we are treading carefully. And I would advise all of you to do the same.

Comments

tmosley Sun, 06/25/2017 - 11:10 Permalink

Bitcoin BUYER beware? Sounds a lot more like Bitcoin SELLER beware.Buy interesting new technology, not promises. The old saying goes, a gold mine is a hole with a liar on top should be updated to the modern era of ICO pumpers.

38BWD22 BaBaBouy Sun, 06/25/2017 - 12:19 Permalink

  I agree re holding LOTS of gold (and even silver, I like gold and platinum better though).But, I see nothing wrong with a small (under 1%) speculative holding in a well accepted crypto (BTC in my case)."Well accepted" is a term that is not precise, but perhaps Ethereum and Litecoin might count too.Also, it is very important to keep an eye on those cryptos and what their leadership is up to!  BTC may break if the Core Wankers and the Miner Wankers don't solve the BTC scaling problem.You can always some gold with BTC if the price runs up to $3000...  :)

In reply to by BaBaBouy

38BWD22 BaBaBouy Sun, 06/25/2017 - 12:36 Permalink

  I'm sure you're right about the Millennials being the (US) drivers of BTC.  But, I am a Boomer who only knows THREE people who personally own BTC, and they're boomers too.I don't know any Millennials who own any BTC at all.....Japan, Korea and India may be starting to buy BTC as well.

In reply to by BaBaBouy

sessinpo BaBaBouy Sun, 06/25/2017 - 13:07 Permalink

Most millenials are clueless about cypto as they are about life itself. Remember, these are kids that expected to make a living with gender studies. Most of the early adopters or crypto were geeks. The crypto community is still very small unless you surround yourself with them, then you are deceiving yourself they are bigger then what they really are.

In reply to by BaBaBouy

The Ram RAT005 Sun, 06/25/2017 - 11:58 Permalink

Buyer beware.  Go out, speculate, lose the kids college funds, then do it again.  Congratulations!  You have become a full-fledged university graduate and can now act superior to the masses.  You are now a card bearing member of club neurotic.  PS - the FED has your back. Sarc on.

In reply to by RAT005

toknormal RAT005 Sun, 06/25/2017 - 12:09 Permalink

@RAT005 Precisely the other way around.

• Bitcoin works as money
• Bitcoin does not work as a Point of Sale system
• Gold & Silver do not work as money (any longer)

The reason for the first point is that bitcoin perform the monetary function that gold & silver have done for 6000 years, except on an electronic platform. i.e. it facilitates 2 attributes of the trade:

• ownership
• posession

It therefore qualifies as a quinessential **BEARER TOKEN** which is what gave precious metals their monetary premium over utility. The metals meanwhile are now illiquid in their physical form and unlimited in supply in their electronic tradeable form which means they are no longer able to perform this monetary function and have been valued accordingly.

Prior to 2009, there was no electronic bearer token. No "real" internet money. A monetary exchange involved 2 counterparties, one which would downdate an account balance at their end and another which would update at the other based on a co-ordinated message. After 2009 and the bitcoin genesis block (January 2009) this is no longer the case. We now have a peer-to-peer electronic asset which can be both transmitted and held on an electronic platform

If you really understood why Gold & Silver became money then yo'll understand why bitcoin is about to be the facilitator of the biggest wealth transfer in living memory and why metal holders are unlikely to see much of it.

In reply to by RAT005

toknormal cayman Sun, 06/25/2017 - 12:41 Permalink

Ethereum isn't going to "stomp" BTC or anything else. It's a completely different type of asset which - amongst other things - is insulated from the equity value that floats on top of it in a way that the monetary assets aren't.

Add to that the fact that it has apparently even more scaling problems that bitcoin and is about to witness a tsunami of more advanced smart contract competitor platforms come over the horizon and the result is that investing in Ethereum now is like investing in electronic typerwriters in the 1960's. A good ride for a while until the next 'tech' wave comes along to drive it into obsolescence.

And that's where the weakness lies because at that point, the business models encapsulated in the meta tokens can simply transfer to another chain, taking their value with them and the sorry bagholder holder of the base blockchain tokens is left with the worthess skeleton.

P.S. Visa debit system is settlement layer for fiat, not a digital asset in its own right.

In reply to by cayman

RAT005 toknormal Sun, 06/25/2017 - 17:06 Permalink

I appreciate the response efforts but I think you are making this too complicated.  Bitcoin and the rest of them are not money because they are created from close to nothing.  The fact that the 3rd or 4th one has made its debut is what I mean.Gold and silver are money, have been for thousands of years.  They are pure, reproduciable and mostly limited in supply.  The effort to achieve them is predictable from a cost and effort perspective.  I've worked in gold mines, I know what I'm talking about.The bitcoin block chain is brilliant.  It's a fun version of currency like Uber is a fun version of a taxi.  Created out of thin air, attacking the establishment.  I get that there is a propriatory computer program to make more, but a different computer program can make different bit coin widgets.  To the extent it isn't abused, it's a fun currency idea.  I actually bought $20 worth of them once so that I could pay a vendor $4 who wouldn't take credit cards.  Now I have no idea where or how to ever retrieve my $16 (now probably $25).  I have never lost any gold or silver ;-)The world doesn't need a new gold and silver.  Current gold and silver are having a little trouble because the gov. of the world are terrified of them.  I suspect Bitcoin and its cousins will soon be partners with the world gov. in some way.  They have a way of taking control of everything that benefits them that itself isn't too real (global warming, transgender, racism, hate speach, disease, etc.)  Bitcoin and world gov. were made for each other.

In reply to by toknormal

RedDwarf RAT005 Sun, 06/25/2017 - 12:18 Permalink

Let's define money.  Medium of Exchange + Unit of Account + Store of Value.Medium of Exchange:  BitCoin is turning to yes.  Gold and Silver?  Not so much.  So by this part of the definition gold and silver are not money.  Very few supermarkets accept gold or silver nowdays.Unit of Account.  All of them fail at this.  Currently only fiat currencies are used as units of accounts in any major way.  I doubt any of us wich to call fiat currencies 'money' however since they are forced upon us.Store of Value.  You can't actually store 'value', meaning the regard or usefulnes someone ascribes to something.  What this really means is retaining purchasing power, ie 'Store of Wealth'.  Gold has a proven track record here.  BitCoin is too new to have a track record worth talking about yet.  That however does not mean it will not perform well here.  We don't know, and to claim you do know is to claim to know the future.IMO, we're never going back to using gold or silver as units of account or mediums of exchange in any significant way.  I think gold and silver will always be stores of purchasing power to one extent or another.  So they will never be 'money' again in the full meaning of the word.  BitCoin or BitCoin 2.0, or whatever will be the next unit of account and medium of exchange.  It is likely it will thus also be a store of purchasing power because it will provide utility due to being well suited for the other two functions of money.

In reply to by RAT005

RAT005 RedDwarf Sun, 06/25/2017 - 17:19 Permalink

Gold and Silver stopped being money when the gov. didn't have enough of it to pay their bills so they declared a new kind of money that they had lots of: green paper.At different exchange rates, you can still buy just about anything you need anywhere with gold and silver.  Of course some of Mark Dices's customers value a candy bar more than a silver ounce so the exchange rate can be shocking.It doesn't matter what the currency is as long as it's trusted and and not faked easily.  Maybe bitcoin is the perfect currency because it's more digital.  Maybe green paper properly backed by silver and gold is a good currency.  But unbacked green paper written in any of the common languages of the world is getting worthless.  Of course that means there isn't enough of it so they have to print more which makes it more worthless......If you were in Venezualla, you'd be pretty happy to have a few ounces in your pocket of that stuff you say isn't money.....

In reply to by RedDwarf

c2nnib2l RAT005 Sun, 06/25/2017 - 15:00 Permalink

Crypto Currency is the future... We might not like it but within the next 20-30 years people won't remember what Dollar actually was trust me on that one.If big banks, and even some countries and visa or mastercard are already considering using blokchain technology you can be sure that this big thing is just behind the corner. But the winner from all Crypto Currency will most likely not be bitcoin but the most transparent and cheap alternative there is out there  maybe RIPPLE or IOTA not sure or maybe banks will create something else that they can control it. Above all  I still think that Gold will be the biggest winner of all in the next financial crash which will probably quietly start with the upcoming Fed QT   Ps...  Currencies like Ripple are still DIRT cheap 0.25 cent !  buy as little as 100 and put it away for a year... you might be surprised if not shoocked in 2018 as this might be your best investment evaaa  

In reply to by RAT005

Justin Case RAT005 Sun, 06/25/2017 - 15:04 Permalink

substitute for Western UnionIt isn't stable enough. You send $3,000.00 and buy the time it's processed, recieved, commissions and converted what will it be? The value is up and down like a toilet seat. It's being traded for profit like a casino, not a currency. What percent of the users are spending it as opposed to speculators trading it for capital gains? How many are keeping records for you partners, the IRA or CRA etc.? Anonymous? hmmm.

In reply to by RAT005

RAT005 Justin Case Sun, 06/25/2017 - 17:25 Permalink

I meant as a means to settle accounts.  Kind of like credit cards and Western Union.  You know, Western Union isn't so cheap either.  Those are currency excercises.  Money means actual repeatable value.  My favorites are gold and silver.  Other places might prefer oil or something like that.

In reply to by Justin Case

Erek Sun, 06/25/2017 - 11:11 Permalink

Where there are big bucks (or the potential for big bucks) there will always be someone there tying to fuck someone else out of it.

WhosJohnGalt Sun, 06/25/2017 - 11:15 Permalink

It's simple -- just pass on buying into ICO's right now.If you're interested in a particular project, wait for them to deliver at least some kind of alpha/beta to the market, evaluate that, and take it from there.Meaning either buy post-ICO or just pass all together if they can't manage to deliver something rudimentary on a modest budget.I would not trade any ETH or BTC for any ICO at this point.

aardvarkk tmosley Sun, 06/25/2017 - 13:15 Permalink

Actually, it IS worthless (relatively).  I just sold my house for less than a quarter mil. Pick that house up and plop it anywhere in SF or NY or wherever and it would go for well over a million, maybe 2.  But I did make a decent percentage profit on it over 2 years, and around here you can also get a really nice apartment for a grand a month or less, which is what I am switching to.

In reply to by tmosley

Justin Case tmosley Sun, 06/25/2017 - 15:14 Permalink

Prior to 1913, most Americans owned clear, allodial title to property, free and clear of any liens or mortgages until the Federal Reserve Act (1913) “Hypothecated” all property within the federal United States to the Board of Governors of the Federal Reserve, -in which the Trustees (stockholders) held legal title.The U.S. citizen (tenant, franchisee) was registered as a “beneficiary” of the trust via his/her birth certificate. In 1933, the federal United States hypothecated all of the present and future properties, assets and labor of their “subjects,” the 14th Amendment U.S. citizen, to the Federal Reserve System.

In reply to by tmosley

Urban Roman sheikurbootie Sun, 06/25/2017 - 11:31 Permalink

Mtgox was just the opposite of your description. People did want to trade bitcoin. but the server was down, they had technical problems, your transction will clear in just a few minutes/days/weeks etc. until the ponzi was exposed.It caused a dip in the price of BTC, but did not change the nature of BTC.By way of analogy: just because you were swindled and your gold was stolen, does not mean that gold is worthless.

In reply to by sheikurbootie