Gnosis, an Ethereum-based prediction market, recently raised $12.5 million 12 minutes in April through an initial coin offering (ICO). An article by the Wall Street Journal today claimed new virtual currencies are “the next big thing” in cryptocurrencies, but noted they pose risks to buyers.
Gnosis is creating a prediction market for quarterly earnings and prices for auctioned artwork.
The tokens do not bestow ownership rights or interest in future profits. Should the startup fail, the token has no value.
Such tokens are more similar to a crowdfunding campaign than to venture capital financing. But this hasn’t stopped buyers from snatching them up. In the first half of May, companies raised $27.6 million from ICOs, compared to all of May 2016’s $3.5 million, according to Smith & Crown, which researches digital currency and blockchain technology.
An early ICO in November from Golem, an “Airbnb for computers,” raised $8.6 million in half an hour. Coin buyers believe the tokens will increase in value as they gain popularity, giving buyers a chance to sell them at a profit.
The price of established cryptocurrencies like Ethereum and bitcoin have also been helped by ICOs.
Tim Draper, a venture capitalist who has supported bitcoin, intends to purchase Tezos tokens. Tezos was founded by a former Goldman Sachs and Morgan Stanley trader.
Buyers anticipate the Tezos coin will become important over time, Draper said. Investors, in essence, are purchasing software as opposed to an asset that bestows ownership rights or profit claims. The returns are not the main reason for buying, Draper said. He said it is a way of thinking how society will evolve.
If a coin issuer introduces a new technology, new users will typically pay a premium for access to it and thereby increase the value of tokens previously sold for the company. Such investing is similar to joining a club a year before others join.
Francis Pouliot, who operates Bitcoin Embassy in Montreal, said the investing public is largely clueless about ICOs, a trend he has criticized.
Even coins from companies with good prospects are poor investment choices, Pouliot said. A startup could choose to reduce the value of future tokens to improve the product’s attractiveness, thereby undercutting the outstanding coins’ value.
There is also the possibility that coins could be regulated as investments.
Coin issuers consider the tokens as products since they can be used to buy goods and services.
Martin Koppelmann, Gnosis co-founder, said he has consulted with accountants but is not sure how regulators will respond. The worst case scenario is having to pay taxes, which is something he can live with.
The U.S. Securities and Exchange Commission chose not to comment on regulating the coins.
Blockchain Capital raised $10 million in April in a third round of fund raising. The ICO was structured like a traditional security. Lawyers encouraged taking measures to be sure the coin met securities laws.
Speculative buying of coins has also raised concern. Gnosis coins have tripled in value since trading began in May.
Ondrej Pilny, who has invested in several startups, appreciates coins’ potential and sees them as a new form of venture capital.
But Pilny only invests an amount he is willing to lose since he sees crypto assets as highly risky. Olaf Carlson-Wee, who has a hedge fund focused on new coins, agrees the risks are big. He said most coins will fail. But the failures are seen as acceptable by investors with a venture capital mindset.
Draper, for his part, thinks he will make a lot of money with coins.
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Last modified: March 4, 2021 4:56 PM