Bitcoin and many of its peers have crashed in recent months from all-time highs reached in December. But that hasn’t dented the popularity of one crypto-fundraising method: so-called initial coin offerings.
Sales of those digital tokens have already raised about $1.66 billion this year, according to research and data firm Token Report. About 480 have launched in 2018 and only 126 of those have closed to new funds. That puts the market on pace to top last year’s total of $6.5 billion raised in coin offerings, according to the firm.
Bitcoin, by contrast, has fallen about 45% since hitting a record high in mid-December.
“ICOs are still not slowing down any time soon,” wrote
in the most recent Token Report newsletter.
What’s more, Token Report’s fundraising tally includes only “closed” offerings. That means two of the largest aren’t included: Telegram Group Inc. and block.one. Together, those two offerings have already raised more than $2 billion, and counting.
Telegram is a private firm that runs a popular online messaging app. It has raised $850 million as part of its token offering, according to a filing with the U.S. Securities and Exchange Commission.
Block.one began its token sale last summer and the offering is running through June. It has collected more than $1.5 billion, according to CEO
For all their popularity, coin offerings remain controversial. It still isn’t clear if some of the sales could at some point be deemed securities offerings by regulators. Plus, many of the businesses conducting offerings don’t have a working product or service, they are often just concepts.
In many cases, the tokens being sold don’t confer any ownership rights in the company selling them. Instead, they will offer a holder the ability to buy the company’s product or service—if it is ever launched.
Nevertheless, investors have forked over billions of dollars to take part in these offerings. Some hope the companies raising funds will prove to be the next hot thing in technology. Plenty of others are hoping to find the next bitcoin-like investment and view the coins as a speculative bet.
Whatever their motive, coin-offering investors have created some of the best-capitalized startups in incredibly short periods. The $1.5 billion raised by block.one in less than a year is equal to the amount raised by
between 2007 and 2011 across nine separate funding rounds. And only four initial public offerings in 2017 and 2018 raised more than the amount block.one has attracted, according to data from Dealogic.
“We could have never predicted this level of success,” block.one’s Mr. Blumer said.
Attracting this level of funds gives companies the ability to quickly branch out.
Block.one plans to use the $1.5 billion to invest in firms that will build services on top of EOS, a bitcoin-like operating platform, akin to Google’s Android, for hosting any variety of applications. The firm formed a partnership with Galaxy Digital, a “crypto merchant bank” founded by
to fund startups building EOS-based projects. One of its first deals was a $30 million investment in a firm called Everipedia, which is building an alternative version of Wikipedia.
Telegram, founded in 2013 and based in the British Virgin Islands, operates a fast-growing messaging app. The company is owned by a Russian national named
Telegram says it will build a network, called the Telegram Open Network, that can process “millions of transactions per second,” according to its white paper, and host a variety of services like micropayments and file storage, which would be accessed via a new token called TON.
In essence, this would transform Telegram from a platform for online chats into a general-purpose hosting service like Ethereum. Mr. Durov didn’t reply to requests for comment.
Even companies that haven’t raised such large amounts of money are finding coin offerings can pay in other ways. Two companies with recognizable names and faded glory,
and Atari SA, both recently licensed their names for coin offerings. Stocks of both companies surged after the announcements.
The continued success of coin offerings is even more remarkable given heightened regulatory scrutiny globally of cryptocurrencies and on the sales of digital tokens.
In the U.S., the SEC and Commodity Futures Trading Commission have heightened their oversight of the coin-offering market. The CFTC recently issued a customer advisory in which it advised people to avoid “pump-and-dump” schemes, and offered whistleblowers a monetary reward in the case of successful enforcement actions.
The SEC has brought enforcement actions against several ICOs, most recently a Texas-based outfit called AriseBank, which had claimed to have raised more than $600 million in an ICO.
That pressure may have led to something of a bifurcation in the market for coin offerings. While large, widely publicized projects like block.one and Telegram have no problem raising money, others have had trouble meeting their fundraising goals.
Researchers at Ernst & Young found that less than 25% of the ICOs in November 2017 hit their goals, down from 93% in June. Token Report said the median amount raised by ICOs this year is about $12 million.
Valuing coin offerings can be tricky, too. Most of the projects are only in the planning stages; it may take a year or more for an actual product to be released. “Current token valuation is more like a gold valuation or a fashion item in high season when a limited supply cannot meet high demand,” the Ernst & Young researchers wrote in a paper.
Write to Paul Vigna at firstname.lastname@example.org