In just a few short months, companies – many of dubious legitimacy – have raised more than a billion dollars through ICOs. Some of the better-hyped offerings in the field of 900 new coins that have been created this year managed to raise tens of millions of dollars in minutes. Investors, who were eager to throw money at the new coins, blindly hoping they would land on the next bitcoin or Ethereum.
With all this money flying around, it’s no small wonder that bankers in New York, Hong Kong and London are abandoning seven-figure salaries to try their luck in the nascent ICO industry, according to Bloomberg. Stories like this have become commonplace with every passing fintech trend, as bankers, fearing the technology’s potential to disrupt the banking business and threaten their bonus pool, hoping to cash in on the next technology enabled “revolution.”
Richard Liu, a former dealmaker at Renaissance China, left the world of finance for the told Bloomberg he left the banking world behind for the chance to climb aboard a “rocket ship” – in reality a $50 million hedge fund that’s invested in 20 ICOs this year, including Tezos, one of the most successful ICOs in the industry’s brief history.
“For Liu, who put together some of China’s 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, ICOs 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’ve drawn comparisons to the first ill-fated dot-com boom. Yet with stratospheric bonuses largely a thing of the past, the allure of an incandescent new arena far from financial red-tape has proven irresistible to some.
‘Traditional investment banks and VCs need to monitor this space closely, it could become very big,’ said the 30-year-old partner at $50 million hedge fund FBG Capital, which has backed about 20 ICOs. He’s off to a quick start, getting in on this year’s 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.
‘Unlike the traditional financial sector, there are no ceilings or barriers. There’s so much to imagine,’ he said.”
Later in the piece, Liu rebutted Bloomberg’s concerns about parallels between the ICO frenzy and the run-up to the dot-com crash, arguing that trying to pick successful offerings presents an opportunity to “carve out a niche.”
“You want to be on a rocket ship,” Liu said. “If you join early, then every day you’re making history.”
The SEC’s declaration that all ICOs should be treated like securities for regulatory purposes is a groundbreaking ruling that will help weed out some of the industry's bad actor by bringing a degree of oversight to the market. The rule change will likely slow the launch of new ICOs, as serious companies figure out how to register their securities, while some of the frauds decide it’s not worth the risk.
Another trader who previously programmed trading algorithms at Bank of America plans to use an ICO to launch his own cryptoasset management firm. In an interview with Bloomberg, he described the ICO market in stereotypically lofty terms.
“Justin Short, who 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. A former Wall Street floor trader, he likens the advent of ICOs to an episode half a billion years ago when many of the planet’s life forms came into existence.
“It’s 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,” he said.”
Ron Chernesky, the owner of electronic trading platform InvestFeed and a former trader, is so optimistic about ICOs that he’s using one to swap out equity-trading capabilities on his platform with cryptocurrency.
“Interest in ICOs remains sky-high. Ron Chernesky started his career as a trader on Wall Street 10 years ago, first on a trading floor and then running trading platform InvestFeed Inc. He’s now in the process of replacing U.S. equities trading on his platform with digital currency trading, and planned to conduct his own ICO to raise 28,000 ether -- worth roughly $6 million at current prices.
“We’re completely ditching the model that we’ve been doing for the past three years and now we’re looking at cryptocurrency,” the 38-year-old said. ‘This is long term for us, we see this as the new gateway to the millennial way of investing and where everything is going from here.’”
One former Forex-trading architect at HSBC tried to illustrate exactly how different factors influence the value of an ICO using that most effective of descriptive devices, the sports metaphor.
“Former HSBC forex-trading architect Hugh 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’t get special access but as the team gets better, more people become fans and the price goes up.
When a football club “builds more relationships with other clubs, gets more matches, and generally enjoys wider adoption, then more people want to be a part of it,” the 40-year-old said. “There 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.”
Of course, as Bloomberg readily admits, valuing ICOs is an impossible task. Developers regularly stumble upon coding flaws in even some legitimate ICOs. Meanwhile, hackers have stolen tens of millions of dollars of investors’ money. Still, these flaws haven’t stopped the market from eclipsing the value of early-stage venture capital funding raised so far this year, as starry-eyed investors, inspired by the newly minted legions of bitcoin millionaires, gamble in the hopes of landing a 1000x return.