Blockchains And Crypto Tokens – Disconnect In Cryptoland

Coming from blockchain technology and its use cases in various industries as diverse as manufacturing, energy, automotive, healthcare and finance, looking at the cryptocurrency market is quite interesting.

Whilst blockchain plays the role of a foundational technology when using it to simplify legacy database infrastructures and adding a lean ‘singleton-ish’ transactional layer to formerly stale and complex technology stacks, most participants in cryptocurrencies don’t seem to be interested at all in the technology behind the tokens. Here, the token’s currency aspects dominate, which isn’t necessarily a bad thing, but…

A brief look at the market shows a huge money influx especially in the last 6 months. About 830 different tokens represent a total market capitalization of just under $90B with the Top 10 currencies representing around 90%, or more than $80B, as of this writing. Six months ago, the total market value was about $15B.

In order to get a better understanding of this phenomenon, we started listening to crypto market’s participants. Since Twitter and Reddit are two major channels of choice, it’s quite easy to get a feeling for the market in a short time. Here is what we have learned so far:


If you come from the technology side of blockchain, you should put your expertise aside, unless you don’t want to go mad: in cryptocurrencies, blockchain does not matter at all – it’s the currency, stupid!
This aspect alone makes you think again: Bitcoin’s CPU-based PoW vs Ethereum’s RAM PoW? Who cares? Single-currency-purpose Monero vs financial settlement network Ripple? Cryptocurrencies, application-specific tokens or meta-protocols, mostly based on Bitcoin? Nothing’s easier than comparing “valuations” of contenders representing totally different asset categories or applications.
Then: valuations. What, exactly, does it mean when Ethereum “is worth” $19B? In its 2014 launch, the Ethereum foundation issued 72m ETH – after three years of mining there’s a total ETH supply of 92m, as of this writing. Mining means, there is a certain inflation built in the currency’s protocol. Is it priced in?
Ok, there are certain tokens, especially the application-specific ones, that could be modeled as economic entities rather than currencies. This allows us to use some of the valuation methods we apply to securities, such as well-established economic and cash-flow models used in equity research. However, investors should be aware that the market price of tokens can differ significantly from the underlying valuation models: a large component of price is speculative in nature and will probably decrease with time, as the ecosystem matures.
Next, there is a strikingly outspoken communications behavior in cryptoland. Many self-appointed crypto investors, crypto traders or, more generically, crypto experts (!), seem to possess some finite knowledge about individual tokens, the crypto market in general, and – which is no differentiator versus the stock markets – they know the future. In other words: the cryptocurrency market is dominated by the same group of traders and investors as any other financial market in its espective infancy. And, as a side note, some occasional Nonviolent Communication training for market participants wouldn’t do any harm.
Disconnect between asset and its value

Our most relevant learning? Blockchain lies at the heart of crypto tokens, but the cryptocurrency market is dominated by people and their strategies without any connection to blockchain technology. Cryptocurrencies are treated as random assets. From the financial market’s perspective, this should not be much of a surprise. However, this disconnect between the value of an asset and its application could lead to major distortions in the future. The very first of these, the fact that blockchain transactions become more expensive the more the asset price increases, are already visible and have significant impacts on the respective blockchains.

In Germany, there existed a segment of the stock market called ‘Neuer Markt’. From 1997 to 2003, the Neuer Markt created many success stories and many more bankruptcies. The originally 30, later 50, listed companies represented a total market capitalization of more than 200B EUR. And, today exactly, we saw the impact of a 1.6 minute sarcastic video presented by Monero developer Riccardo Spagni during the Monero meetup prior to Token Summit.

Evil to him who evil thinks.

How to successfully manage an ICO

This article was originally published as “The Ideal Initial Coin Offering ICO” on CROWDSTART CAPITAL.

The concept of buying shares in a public company by participating in an Initial Public Offering  IPO isn’t a Wall Street invention. The earliest form of raising capital from the public can be traced back to the Romans. So-called publicani – legal bodies like joint stock companies of today – raised capital. The shareholders were the owners of the company in proportion to the number of shares that they had bought.

At the beginning of the 17th century, the Vereenigde Oost-Indische Compagnie (VOC) – better known as the Dutch East India Company – was the first modern company that used an IPO to raise capital. The original raised capital was 6,424,588 guilders, equivalent to 3,2 million USD. The company was able to raise this large sum of money since its owners had decided to let participants share ownership of the company by letting them buy shares. Today, IPOs are complex procedures based on extensive regulations. In the US, a small company with a very efficient CFP could manage to IPO within 3-4 months, provided that there are no substantial SEC comments, lawsuits, compliance mistakes or unfavorable market conditions. This timeline is based on perfectly prepared initial filing documents that need additional 2-3 months to be prepared.

Enters the Initial Coin Offering, or ICO. With the birth of Bitcoin in 2008, the first digital token was created, that, after the 10,000 Bitcoin payment for a pizza by developer Laszlo Hanyecz in 2010, could be used as digital cash, or a cryptocurrency.  Since then, many other cryptocurrencies have entered the market that has a total value of around $30 billion. In April 2017, about 800 different cryptocurrencies have been launched, roughly 12% of them through an ICO.

We won’t explain ICOs in detail – that has already been done very well before, e.g. over at our friends of Outlier Ventures or here.

How to ICO

Instead, we want to suggest how to design an ICO in a way that not only helps the project to be financed but that also makes investors comfortable and happy. Since the ICO market is relatively new – the first ICO was done by Mastercoin in  July, 2013, and raised 5,000 Bitcoins worth around $500,000 at the time – there is no jurisdiction at all, except in two countries: Switzerland and Singapore. Both countries have already issued guidance on the tokenization.

Whereas Switzerland’s guidance was explicitly applicable to the Ethereum token Ether (the Ethereum foundation had their ICO in July, 2014, raising more than $18 million), the Singapore Monetary Authority and the Singapore law classify a cryptocurrency as an asset – and not as a security. This clear guidance and the lack of such in the US, was the main reason for Blockchain Capital to structure their venture capital ICO as a closed-end fund out of Singapore issuing BACP tokens under two specific exemptions – Regulation S and Regulation D exemption – by the SEC.

Requirements of an ideal ICO

Different to IPOs, the regulatory framework for ICOs is not yet outlined at all. For the first wave of ICOs that means to raise money in a somewhat grey area. The ICO project team can’t be sure whether they act in a compliant way And that’s the reason for everyone planning an ICO to come up with the best possible process for either the project and its investors. The better the ICO is designed, the higher the opportunity to raise a significant sum of money in a quasi-compliant way.

First, there is no idea ICO and there might not be in the future. You might always find some aspects of an ICO that could be criticised. However, we want to share our perspective on how to do an ICO in the right way.

  1. Transparency

If you think about giving your money to another person or an institution you don’t know, this person or institution should create trust in order to justify the money transfer. Trust always begins with transparency. You would lend a person money if she is your friend or at least very well known to you. In former times you would have given your money to a bank because you might have thought that banks were trustworthy just because of being a bank. Having experienced one or more financial crises and/or having watched The Big Short, you might select your bank more wisely. However, regardless of any specific banking institute, most of them participate in a financial system that at least guarantees that your money will be safely wired to a bank account.

Now, do some blockchain project teams use their bank accounts? Not necessarily: they will more likely ask you to send over some of your Bitcoin or Ether, either into their cryptocurrency wallets directly, or to a cryptocurrency platform or exchange you might have never heard of. That could require you to open a new account with that platform, which might be headquartered in Eastern China. We have nothing to say against cryptocurrency platforms in Eastern China in general, but the ICO investor should be prepared to work with an entity whose credibility she might not be able to research thoroughly.

What does that mean for the project team? It means that the ICO Responsible ICOR should:

  • carefully select the institutions that will distribute his tokens,
  • describe these institutions in a detailed way and
  • ideally provide potential investors with specific information on how to open accounts; s.a. limitations regarding nationality, required documents, etc..

The next transparency aspect refers to to the ICO process in general. The ICOR should openly communicate:

  • What is the general purpose of the ICO (market, business, challenge, solution, etc.)?
  • What is the product or service the project team is working on and that will be financed?
  • Who are the members of the project team (background, credentials)?
  • What are the token offering terms (denomination, cap, trading terms, structure, roadmap)?
  • Which opportunities and risks are known and/or could occur?

The more transparent the ICOR is in describing the ICO, the easier it will be for investors to establish the required level of trust.

  1. Quasi-Compliance

As long as there is no real guidance to carry out an ICO, the best advice is to act in a quasi-compliant way. For the ICOR that means, she should:

  • inform herself about the guidance and the compliance aspects of IPOs,
  • get herself professional support regarding capital market and general legal as well as tax-specific aspects,
  • carry out a due diligence of the ICO’s structure and process (she might need professional support) and
  • install an advisory board consisting of experienced professionals in in the fields of Finance and Law,
  • add comprehensible controls, s.a. lock-up periods for members of the project team and investors, that should minimise the volatility of the token’s value in the first trading period and
  • select and cooperate with third parties, s.a. cryptocurrency exchanges that themselves are compliant and have a sound track record in doing business.
  1. Investor Relations / Communications

The term Investor Relations IR stems from traditional stock markets and defines how publicly listed companies have to communicate to their shareholders. There is no such definition regarding ICOs and their investors, yet. Still, in reference to a quasi-compliant behavior, the ICOR should:

  • communicate openly and in a timely manner
  • communicate all relevant aspects of the ICO
  • install a support channel for investors who have questions and/or problems
  • coordinate press coverage
  • release relevant financial data and news and
  • be prepared to handle a potential crisis (hack/attack, high token price volatility, etc.)

It would be wise to not outsource the communication to investors to internal or even external PR, but to completely integrate this task into the ICO project team. This should ensure that token holders are provided relevant information and that the ICO team will be informed about potentially changing regulatory requirements and advised how to cope with that.


Transparency, quasi-compliance and communications are the main pillars of an ICO. As long as the ICOR takes these aspects seriously, the ICO team and investors should expect a successful project progression. The closer the ICOR sticks to these requirements the lower the risk of acting in a non-compliant way. And, speaking not only of risks but also of the opportunities – a well-managed ICO levels the playing field between financial institutions (s.a. venture capitalists) and individuals, offers lower fees compared to traditional investment processes and opens up the market for consumer-facing investment opportunities.

If you want to evaluate an ICO you might use this as a guide. Since we believe in practicing what you preach, you may evaluate our own forthcoming ICO based on the principles mentioned above. Since we will be raising money to invest that money in Blockchain startups we manage our ICO in a quasi-compliant way. Since we’re based in Germany and all investments will be done in Germany, we will act within the given regulatory framework and we will communicate in a transparent and meaningful way.

What is an Initial Coin Offering ICO?

ICOs have become a popular way to fund any kind of projects on the blockchain. An ICO is an event in which a project sells part of its to be offered digital tokens to early investors in exchange for money today. ICOs provide a way for project creators to raise money for their future operations. The digital tokens don’t necessarily function as cryptocurrencies by allowing investors to pay with it, but can have other or additional key functions, such as representing tokens for using smart contracts in a respective blockchain.

The ICO usually takes place before the project is completed, and helps the project team fund the expenses undertaken until launch. For some of the larger projects, part of the ICO money goes into a foundation that provides ongoing support to the project. They also work as an initial distribution model for the digital tokens, especially those with a PoS consensus algorithm.

Typically, anybody can participate in an ICO by investing some money. The ICO participants are invested in the success of the project.  And they provide early liquidity for the digital tokens when they start trading. As co-owners of the project participants can help spread the word and raise awareness in their respective communities.  They are also usually motivated by a profit potential if the project takes off and the tokens become worth more than the ICO price.

What’s the difference between an ICO and an IPO?

At first glance, ICOs resemble the better known IPOs. An Initial public offering (IPO) or stock market launch is a type of public offering in which shares of a company usually are sold to institutional investors that in turn, sell to the general public, on a securities exchange, for the first time. There are some similarities between ICOs and IPOs – both of them are used to sell a stake and raise money, and both invite investors who (hopefully) recognize both the potential and risk of investing their capital in order to make a future profit.

However, there are significant differences: Because of the infancy of the digital token market, ICOs are mostly supported by early enthusiasts and not necessarily by professional investors. In that respect, they are similar to crowdfunding, but with the backers having a financial stake in the project. ICOs are also not regulated or registered with any governmental institution and there are usually no investor protections other than what is built into the project’s and/or the digital token platform itself.

Today, most ICOs are marketed as digital presale tokens akin to giving early access to an online platform or game to early supporters. In order to try to avoid legal requirements that come with any form of a security sale, such as in an IPO, many ICOs use legal disclaimers and tell the participants that they won’t participate in a securities sale.  Different to most crowdfunding campaigns, ICOs don’t account as donations because they give digital token purchasers a stake in the company and a right to vote on future decisions. Neither can they be called the cryptocurrency equivalent of stocks. The U.S. Securities and Exchange Commission SEC and their counterparts in other countries have remained largely silent on whether digital tokens account as securities. A framework tries to weigh in on the issue but stops short of providing a definite answer, part of which is due to the unregulated nature of blockchain itself.

How does an ICO work?

Rather than issuing a formal prospectus or Information Memorandum as in an IPO, most ICOs are represented by a technical white paper, timelines, project goals and other information that will help potential investors understand and evaluate the project. The white papers are very similar, in structure and format, to traditional academic whitepapers. They explain the project itself, how the platform will work, how it can benefit participants, and how the project will be developed technically using the proceeds of the ICO. Since ICOs happen before project completion, or sometimes even before the project starts, being transparent and comprehensive about the details of the project is key to gaining trust and appreciation with potential investors.

After the ICO’s launch, digital tokens are made available for sale and will have value in the future for those who will work with the platform and/or for those who will use it as traceable assets. While in the very first phase of ICOs, the preferred currency was Bitcoin, most projects launch their own cryptocurrencies today. A list of cryptocurrencies can be found here.

ICOs typically last from a few days to a few weeks, depending on how quickly the initial supply will be sold. Therefore, investors should be aware that the ICOs roadmap reflects the plan of the project’s founders but doesn’t necessarily fit into reality, when there is excess demand and the offering must be closed earlier because the cap on the total amount raised is met before the proposed end of the offering.

Once the ICO is completed and the project launched afterwards, the digital tokens typically get listed on cryptocurrency exchanges to trade against other cryptocurrencies or fiat money. The price usually reflects the overall cryptocurrency market sentiment, project-specific news, the addition of new features and the ability of the project team to reach their goals described in the business plan.

Advantages and downsides of an ICO

An ICO is a great way to bootstrap a blockchain based project and gain the initial capital necessary to motivate a talented team to join the project and get started. It is possible to raise as much money as in a typical seed round. of a venture capital VC or business angel funding. The difference, however, is that the founders don’t need to give up equity for the money invested.

An ICO removes many of the hurdles present in the VC process and allows startups to take the shortest way to the market by directly presenting the idea to potential customers and gauging general interest on the project.

A problem with ICOs is that many of them have turned out becoming scams, ideas that never materialized or failed to deliver on their promises. Building on the hype surrounding digital tokens in general, some teams launched projects that lacked solid ideas and not enough initial research was done to prove the viability of the project.

Investors, on the other hand, usually cling on to the general success of Bitcoin and successful ICOs like Ethereum, one of the most successful ICOs ever, and see every ICO and blockchain project as the potential for making easy money. Due to the fact that becoming an investor in an ICO is very easy – you just have to verify yourself as a natural person with an address in a country the project teams allows to participate, some investors might lack a sound practical or theoretical investment experience and therefore might not be prepared for the things to come.

Following several cases of failed projects and outright scams, there has been a raise in wariness and skepticism toward ICOs, and the landscape is gradually self-regulating itself by adopting a set of rules and best practices to evaluate every project. There are now platforms performing due diligences on ICOs and help investors better asses the risk structure of the project. That’s forcing project teams into being more clear and transparent about their projects.

Another problem with ICOs is that, unlike venture capital investments, they  aren’t regulated or registered with any government or organization and therefore offer no investor protection. They owe this characteristic of ‘trustlessness’ to the nature of the Blockchain technology that supports them.