Richard Liu gave up a seven-figure salary this month to get into one of the hottest financial instruments around right now: initial coin offerings. The former China Renaissance deal-maker has since backed a clutch of cryptocoin sales that’ve raised millions — sometimes in seconds — often without a single product.
From Hong Kong and Beijing to London, accomplished financiers are abandoning lucrative careers to plunge into the murky world of ICOs, a way to amass quick money by selling digital tokens to investors sans banks or regulators. Cut out of the action, a growing cohort of banking professionals are instead applying their talents toward buying or hawking cryptocurrency.
They’re going in with eyes wide open. For Liu, who put together some of China’s biggest tech deals in his old job, the chance to shape the nascent arena outweighs the dangers of a market crash or crackdown. Loosely akin to IPOs, ICOs have raised millions from investors hoping to get in early on the next bitcoin or ether, and their unchecked growth over the past year is such that they’ve drawn comparisons to the first ill-fated dot-com boom. Yet with stratospheric bonuses largely a thing of the past, the allure of an incandescent new arena far from financial red-tape has proven irresistible to some.
“Traditional investment banks and VCs need to monitor this space closely, it could become very big,” said the 30-year-old partner at $50 million hedge fund FBG Capital, which has backed about 20 ICOs. He’s off to a quick start, getting in on this year’s largest sale: Tezos, a smart contracts platform that raised $200 million to outstrip the average Hong Kong IPO size this year of around $31 million.
“Unlike the traditional financial sector, there are no ceilings or barriers. There’s so much to imagine,” he said.
Critics say many ICOs are built on little more than hyperactive imaginations. A cross between crowdfunding and an initial public offering, they involve the sale of virtual coins mostly based on the ethereum blockchain, similar to the technology that underpins bitcoin. But unlike a traditional IPO in which buyers get shares, getting behind a startup’s ICO nets you virtual tokens — like mini-cryptocurrencies — unique to the issuing company or its network. That means they grow in value only if the startup’s business or network proves viable, attracting more people and boosting liquidity.
That’s a big if, and the sheer profusion of untested concepts has spurred talk of a bubble. The U.S. Securities and Exchange Commission signaled greater scrutiny of the red-hot sector when it warned on Tuesday that ICOs may be considered securities, though it stopped short of suggesting a broader clampdown. The regulator however did reaffirm its focus on protecting investors: part of the appeal of ICOs lies in the fact that — for now — anyone with a bold idea can raise money from anybody.
At least 90 ICOs have taken place this year, raising more than $1 billion based on proposals from free wi-fi sharing to trading software without a single line of code. It’s already exceeded early-stage venture capital financing. With little more than an explanation of the ad-lite browser it envisioned, Brendan Eich’s Brave Software scored $35 million for its Basic Attention Token sale in under a minute in May.
“These ICOs are not selling shares, which means their investors will have to count on the promise and reliability of the founders,” said Beijing-based Chandler Guo, a bitcoin miner and angel investor who’s helped more than 20 ICOs list on cryptocurrency exchanges. So “I don’t invest in any projects unless I know where they live and their mother lives.”
Justin Short, who created electronic trading algorithms for Bank of America Corp. before launching trading-related startup Nous, is preparing to launch his own sale of digital tokens to bankroll what he calls cryptoasset portfolio management. A former Wall Street floor trader, he likens the advent of ICOs to an episode half a billion years ago when many of the planet’s life forms came into existence.
“It’s a Cambrian explosion of ideas. But that means you have to put in your work to figure out which one is even likely to work,” he said.
Cryptocoins bypass middlemen such as fee-absorbing banks and venture capital firms, and offer access to fast money. But that also means traditional checks and balances are absent. The key may be to recognize which tokens serve an essential purpose to the selling startup’s network, and thus will appreciate in value alongside rising adoption.
Former HSBC forex-trading architect Hugh Madden, currently Chief Technology Officer of Hong Kong-based ANX International, this month helped raise about $18.7 million for cryptocurrency exchange OAX. He likens ICO-token ownership to a football club membership. You don’t get special access but as the team gets better, more people become fans and the price goes up.
When a football club “builds more relationships with other clubs, gets more matches, and generally enjoys wider adoption, then more people want to be a part of it,” the 40-year-old said. “There is no limit to participants, but there is a limit to memberships that allow members to exert influence on the future direction of the club.”
With ICOs however, the true price of membership can be impossible to gauge. Prominent bitcoin developers including Peter Todd have pointed to coding flaws in projects. Trading platform CoinDash said hackers made off with $7 million during its ICO just this month. Hackers made off with nearly $40 million last week, stealing ICO funds from CoinDash, Swarm City, æternity, and others. And a significant number of ICOs have been underpinned by mere protocols — operational frameworks with standard processes minus a business model.
“It’s very hard to value a protocol,” said Gavin Yeung, a former Hong Kong-based trader at Deutsche Bank AG who’s weighing an ICO for his cryptocurrency index trading platform Cryptomover. “The protocol only becomes valuable if the number of users increase exponentially on the network, so unless these protocols have substantial users or awareness, these projects could end up with zero value.”
The rush of speculators and get-rich-quick schemes in the space has both Yeung and Madden expecting more regulatory scrutiny. But the challenge is ICOs aren’t confined by geography. For example, OAX’s token attracted 4,400 backers across a dozen jurisdictions from China to Russia and the U.S. “It’s very hard for regulators to have an isolated policy response that’s happening on a global cross-border basis,” Madden said.
Interest in ICOs remains sky-high. Ron Chernesky started his career as a trader on Wall Street 10 years ago, first on a trading floor and then running trading platform InvestFeed Inc. He’s now in the process of replacing U.S. equities trading on his platform with digital currency trading, and planned to conduct his own ICO to raise 28,000 ether — worth roughly $6 million at current prices.
“We’re completely ditching the model that we’ve been doing for the past three years and now we’re looking at cryptocurrency,” the 38-year-old said. “This is long term for us, we see this as the new gateway to the millennial way of investing and where everything is going from here.”
Perhaps. Liu, the ex-China Renaissance executive, compares the ICO market to the first internet boom and bust, when startups from Webvan to Pets.com imploded and investors’ money went up in smoke. Yet it’s in part the opportunity to carve out a niche away from monolithic banking bureaucracy that’s lured him to this space.
“You want to be on a rocket ship,” Liu said. “If you join early, then every day you’re making history.”
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