Investment Recommended

What family offices should know about investing in Initial Coin Offerings

Photo by Chunumunu/iStock / Getty Images
Photo by Chunumunu/iStock / Getty Images

To invest in the feverish world of initial coin offerings (ICOs) means inhabiting a regulatory grey area. ICO’s or token sales are used to crowd-fund technology projects by issuing digital tokens on blockchains – a revolutionary way of securing value on immutable shared-memory databases.

These tokens, which are often traded on cryptocurrency exchanges after issuance, can either be thought of as equity tokens (speculative ownership), or utility tokens (fuel to allow participation in the network).

The vast majority of tokens seem to fall into the first category. This is problematic from a regulatory standpoint because it involves buying equity in something which is, usually, yet to be built, with a speculative value which will be realised at some point in the future; in other words a security. There are strict laws on selling securities, for good reason.

There appears to be a top tier of “serious” projects, the sort that seem to be effortlessly raising $50m-plus in coin offerings. Look for independent academic appraisal of these proposals

Some of these token sales, such as those being issued by rappers and the like, are clearly to be avoided. There some are viable technologies which will probably gain some degree of network effect in the future and increase in value. But buyer beware is the order of the day here.

There appears to be a top tier of “serious” projects, the sort that seem to be effortlessly raising $50m in coin offerings. Look for independent academic appraisal of these proposals; the team at Cornell are very good on this and have called out some of these projects for having technological proposals that are fundamentally flawed – and engineering work has not even started yet.

Being in the HNW bracket affords investment opportunity to some of these token sales, because the SEC’s “accredited investor” status ($200,000 a year in income for the last few years, or $300,000 a year if married, again for more than one year. Otherwise, $1 million in assets, which doesn’t include the value of a primary property) is currently being invoked by some ICOs as an exemption from having to register as a security under US law.

It must also be said, we are very possibly at some stage in a cryptocurrency bubble (apparently thousands of people a day are opening accounts with Coinbase, the major crypto exchange) and a big re-adjustment in value is possible. ICOs were recently banned outright in China, where there were about 60 sales a month happening, all investing in one another, while tapping into the gambling spirit of the Chinese peop

It may in retrospect turn out that the Chinese authorities were being more sensible than draconian on this case. Meanwhile, the SEC has deemed ICOs securities and warned celebrities to stop promoting them, while places like Zug in Switzerland are ICO easy and invite sales, token foundations, self-regulation etc.

In terms of important sales coming up, the next available is the utility token sale for Patrick Byrne’s tZERO exchange. This is the only SEC regulated alternative trading system custom built to handle blockchain tokens. These tokens will be required to trade on the tZERO exchange, which, importantly, has already been built.

This was a visionary move by Byrne and his team; it’s a very serious project, two years in the making, and not to be confused with the sort of half-baked ICOs rushing to happen with nothing but a sketchy white paper. The tZERO sale is slated for around Thanksgiving.

Other noteworthy token sales are Blockstack, the well-established stepping stone to an entirely decentralised web, which is beginning soon. Chia Network, the ecologically friendly alternative to Bitcoin created by Bit Torrent inventor Bram Cohen is an interesting proposition. Academic peer review and engineering work is commencing, and although no date has yet been announced, a token issuance is forthcoming early next year.

In addition, there are probably some worthwhile investments out there in the more traditional cryptocurrency ecosystem. Ripple is still rather cheap, although it has gone up quite a bit lately. And Ethereum, the father of all ICOs today, is arguably undervalued and likely to rise as the community progresses along its technological roadmap. ZCash is also a safe bet, and potentially a gainer in hash power as Ethereum makes the gradual transition to proof of stake.


Disclaimer: the author does not own any cryptocurrency, does not plan to take part in any ICOs.