Consider Both Sides of the Digital Coin

Consider Both Sides of the Digital Coin

The initial public offering, or IPO, has barely had an impact on financial markets since the millennium began. Will the initial coin offering, or ICO, fare better?

A revival of companies going public, or in some way enabling the public to invest in them, would certainly be welcome, as it would give investors an opportunity to invest in up-and-coming companies, while providing much-needed capital to enable faster economic growth.

It used to be almost every entrepreneur’s dream to start a company and take it public, but consider how far IPOs have fallen.

In 2000, 406 companies went public, which was a drop from 486 the previous year. In 2001, just 84 companies went public and the IPO market has not recovered since then. The number dropped to just 31 in the financial crisis year of 2008, but reached only 105 in 2016.

Fewer IPOs have led to fewer listed companies, as some companies are acquired, delist, merge or fail. In 1996, there were 7,322 listed companies in the U.S. The Economist noted earlier this year that there were only 3,671.

Unicorns Proliferating

A combination of over-regulation, technological changes, lawsuits and changes in financial markets has made the IPO a rarity. Instead, most companies are remaining private, which leaves investors with a shrinking number of companies in which to invest.

Unicorns, which are private technology startups with valuations of more than $1 billion, were nonexistent in the 1990s. Now there are 174 of them. While some of those valuations may be unrealistic, it’s not a sign of a healthy market when companies that large are remaining privately held.

Enter the ICO

Given the lack of IPOs, it’s perhaps no wonder that ICOs have emerged, raising nearly $1.5 billion this as of this past summer. So, as MIT Technology Review asked recently, “What the hell is an initial coin offering?”

While an IPO offers shares in a company, an ICO offers digital assets called “tokens.”

Bitcoin, the most popular and well-known token system, is a digital currency (aka, cryptocurrency) based on blockchains. A blockchain is a digital ledger in which transactions made in digital currencies are recorded chronologically and publicly. It’s pretty far removed from the “passbook” for a bank savings account, but it serves the same purpose.

Opportunities and Problems

As MIT Technology Review noted, the ICO has the “potential to upset business as we know it,” which may be a good thing or a bad thing.

Investors in cryptocurrencies have, in many cases, made a great deal of money. The price of Bitcoin recently was up more than 470% this year, hitting an all-time high of $5,856.10, and many surveyed by CNBC predict it will reach $10,000.

Bitcoin price, tracked on the World Coin Index.

Conversely, JPMorgan Chase CEO Jamie Dimon called Bitcoin a “fraud” and said “if you’re stupid enough to buy it, you’ll pay the price for it one day.”

In addition to being hyped and not widely understood, cryptocurrencies are vulnerable to money launderers, hackers and other swindlers. Zero Hedge says the ICO market “has become a cesspool of fraud and abuse.”

One of the first big ICOs, by the Decentralized Autonomous Organization (DAO) in May 2016, was hacked, resulting in a hacker stealing $80 million in Ethereum digital currency.

Tezos ICO Imploding

Then there’s the Tezos ICO, which sold more than $230 million in tokens after promising to build a better blockchain for cryptocurrencies.

The Wall Street Journal reported “a battle between the founders of the company and the head of the Swiss foundation they installed to give it more independence has put most trading of Tezos coins on ice, possibly until early next year.”

Zero Hedge added that, “The shakeup started after Tezos founders Arthur and Kathleen Breitman reported the delays in a blog post published (Oct. 18). But even more alarming, the pair accused Johann Gevers, the head of a Swiss foundation which oversees their funds, of attempting to overpay himself using the massive pot of investor capital – despite the fact that the company will likely blow through its promised deadline of allocating tokens to buyers by December (the tokens have yet to be created).”

Maybe the ICO market can overcome the hacking and the hype, the corruption and the technological huddles it faces, but the obstacles are significant.

An alternative to the IPO is needed to fund startups and help the economy grow. Whether ICOs are the answer remains to be seen.

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