Tag: ICO

Game of loans

In my article on start-up unicorns, I already presented how most start-ups finance their operations and how efficient this way of work is. This article will show how companies and wealthy individuals finance their operations once they reach unicorn status and have already managed to execute a successful IPO or ICO.

But before explaining the financial workflow, let’s analyze what an IPO is and how it integrates with the standard capitalism-based system. At its core, IPO operates the same way as every ordinary bank. People trust the company doing IPO and are willing to buy common stocks of this company. Additionally, let’s analyze a little bit how banks evaluate a given company to calculate its value. Usually, it is a combination of all of its assets, including the common stocks from the stock exchange. So far, so good; however, the stock exchange evaluation rules are pretty exciting. More specifically, the rule of how the end-of-day price calculation is done. It is based on the amount of money an individual is willing to pay for a given stock. And here is the part that must bother us – one big chunk of a given company evaluation is entirely based on people’s trust in the company. It is not based on any real-life assets such as gold, art, or real estate. It is entirely based on faith. We can even safely assume that we ll are living in a trust-based economy.

On the diagram, you can see a standard way of how wealthy individuals finance their operations. They use the IPO/ICO to increase their liquidity and apply for a loan after that

But let’s go back to loans – how do we calculate the personal wealth of people. The answer is a simple one. The same way banks calculate the evaluation of a company – aka based on all personal assets, including stocks. When wealthy individuals decide to buy something or invest in something, they have two ways of doing that – to sell assets or to get a loan.

Usually, most of them are willing to get a loan based on the current evaluation of their stocks and payback later. However, to give the loan, the bank does the review based on the willingness of someone to buy the stocks at a given price. In traditional banking, this usually triggers the central banks to issue a new amount of the local currency to provide the bank with the amount of money necessary to give the loan. So, in short, every time the bank provides a loan based on stocks, we pump new money into the system and lower down the buying power of everyone attached to the local currency.

In conclusion, most wealthy individuals prefer to finance their operations using loans instead of selling stocks at the current value. However, getting a loan increases inflation because the central banks have to issue new money to fund these loans. Another question is how much is the buying power of our modern billionaires compared to the ones in the past. For sure, most of them can not afford to finance the operations of over 1000 public libraries with their own money.

The fail of ICO as a financial alternative to traditional stock exchanges

The killer of IPO, the new fintech revolution, the path to decentralization – all of these were the nicknames of ICO. But, what is an ICO? The initial coin offering (ICO) is a financial mechanism for a company to raise new capital. Usually, the reason for that event is to fund new services or business opportunities. Sometimes is to provide an alternative for financing early-stage digital innovations through crypto-assets.

Failure of ICO

Unfortunately, an initial coin offering is not always successful in attracting enough traction and investment. According to official research, around 800 cryptocurrencies are declared dead since 2018. It is a considerable decline in trust in ICO. 

Some examples of initial coin offering failures;

  • Swiss coin: Swisscoin was designed for a broad audience and the needs of small investors and traders. Using Swisscoin was to build up a payment system in which soon over a billion people will participate. However, it failed, and there is no traction for the last three years.
  • Enigma: Enigma is a decentralized data marketplace protocol and cryptocurrency created by a team of Massachusetts Institute of Technology graduates and researchers and incubated at MIT Media Lab. The Enigma protocol is a second-layer, off-chain network that aims to solve scalability and privacy issues on the blockchain. However, they got hacked.
  • The DAO:  The DAO was a decentralized autonomous organization (DAO) launched in 2016 on the Ethereum blockchain. After raising $150 million worth of ether (ETH) through a token sale, The DAO was hacked due to vulnerabilities in its codebase. The Ethereum blockchain was eventually hard forked to restore the stolen funds. However, not all parties agreed with this decision, which resulted in the network splitting into two distinct blockchains: Ethereum and Ethereum Classic.
To participate in ICO, people must have crypto wallets. After the initial coin offering, the coin is usually transferred to your wallet. You can use them to pay for something as soon as someone is ready to take your tokens.

Is the presence of an IPO the reason for the failure of ICO?

Yes! The main reason behind the failure of ICO is IPO. Most investors trust IPO instead of ICO. Companies do not back Bitcoin and Ethereum, so they are more community-based, which is entirely another financial mechanism. In the case of IPO and ICO, we usually speak about investors. Primarily, ICO deals with early investors who are interested in investing in new projects. However, most investors think that ICO is less reliable than IPO because of two reasons:

  • No regulation: To list your company on the stock exchange and make an IPO, your company must endure an exceptionally detailed and harsh financial audit. With ICO, this is not the case. There is no regulation, and you have to believe in the company owners’ words and vision.
  • No attachments: In case of company bankruptcy, there are legal attachments between the shareholders and the company owners with IPO. With ICO, this is not the case. If the currency is dead, there are no legal consequences.

In conclusion, I am personally a big fan of cryptocurrencies as technology. However, from the financial point of view, they are a little bit of a nightmare. Without regulation and centralized authority, you can not control inflation. And unfortunately, a community-based cryptocurrency will most probably end the same way as Bitcoin and Ethereum are behaving at the moment.