Emergence of New Digital Economy
Internet → Bitcoin → Blockchain → Smart Contracts → Token Sale “ICO” Events.
The explosive growth of a new techno-social movement—broadly characterized by bitcoin’s meteoric rise in value—has even its pioneers and thought-leaders’ heads spinning. Here is a snapshot of how the movement has arisen.
Bitcoin was developed in reaction to the 2008 faltering of financial institutions which were deemed by “too big to fail” and being revealed as untrustworthy by the average citizen. Bitcoin was successfully designed to enable direct person-to-person transfers of value wherein the enabling intermediary is a trustless (i.e. performs incontrovertible actions), transparent (i.e. open to public scrutiny) and distributed (and by everyone, therefore incorruptible) technical enablement platform (i.e. owned by no-one), a distributed ledger maintained in real time by tens of thousands of independent computers around the world, called Blockchain. But Blockchain’s utility was immediately seized upon as being much more than just the rails for Bitcoin transactions. As a database of events widely distributed among thousands of participants to ensure a common record of fact, Blockchain promises to become the very foundation of a more Utopian world.
The evolution of the new global, digital economy is so rapid that even online notifications are too slow to keep up with the pace of the news. The total market capitalization of digital currencies (aka “cryptocurrencies”) is probing $250B with bitcoins alone soon to breach $10,000. However, building on the massive momentum of bitcoin, new digital currencies have emerged that provide far greater utility, most particularly Ethereum, whose ether currency allows, like Bitcoin does, direct transfer of value but additionally adheres to the terms of smart contracts-programmed rules and instructions for the accessing or utilization of the value.
Due to the precise, automated and self-executing controllability of how the value in ether may be disbursed, a new form of crowd financing emerged, initially called an Initial Coin Offering (ICO) but rapidly being refined into a Token Sale Event (TSE). Through TSEs, companies are able to issue digital tokens (or coins) which represent specific benefits or assets that the company is willing to sell to the public so that individual investors can participate in and benefit from the growth and operations of the company. So, TSEs are when companies issue tokens for sale directly to the public which are subsequently made available for trading on digital exchanges.
Having only started in earnest in 2016, Token Sale Events have already provided more than $3B+ in funding for new technology ventures, overshadowing venture capital, and introducing new models for the participation in the operations and value of businesses. In fact, the explosive growth of TSEs as a self-regulating financing vehicle—wherein fortunes raised by sometime dubious startup ventures and fortunes made by early investors in their tokens—have caused concern about their authenticity and legal status in many jurisdictions. The key considerations for legitimacy of a TSE are:
The nature of the token – is the token designed and implemented as a Utility Token or a Security Token? The former offers the buyers participation in and benefits from their token ownership wherein the token functions much like membership in a loyalty program. The vast majority of tokens sold to date have been utility tokens. However, as the token economy matures, more and more security tokens are being offered and purchased with the intent of the buyer enjoying passive income or a financial gain from the token. These are securities and are therefore bound by securities regulations in most jurisdictions which protect investors. Problems have arisen when companies believe and advertise they are issuing utility tokens but regulators then deem the tokens to be securities. Bitcoin itself is a utility token that has security token attributes. Being that bitcoin (any fraction or multiple of bitcoin) represents a unit of account on the Bitcoin ledger, and you can’t utilize the Bitcoin Blockchain exchange without a bitcoin, bitcoin is a utility and not a security. Nonetheless, the value of bitcoin has been driven by increasing demand and diminishing availability mostly by purchasers who are seeking securities-like financial returns.
The state of maturity of the companies issuing tokens – stories of startups, with not much more than a strident mission, raising many millions of dollars in a matter of days has created the misperception that TSE are a quick source of cheap and easy money. That has led to a global stampede of startup companies executing highly speculative and often inauthentic TSEs. There are now far too many companies pursuing TSEs that do not have a substantive business case and mission. And, to the extent that these TSEs are successful, they can create overcapitalized and mismanaged companies whose token values will perish to the companies.
The bigger picture, however, indicates that TSEs are maturing into what could be called mini IPOs for a new digital global economy. An increasing number of promising businesses are executing TSEs to raise legitimate product development capital or business growth capital. Robust and authentic TSEs now require significant investments of Capital ($400,000 – $600,000) and time (three to nine months of intensive effort), the focused attention of effective Management, and a solid and scalable Business Model and Mission. These prerequisites separate the wheat from the chaff. In parallel, systems are emerging to differentiate promising legitimate TSEs from pump-and-dump scams, for the benefit of prospective token buyers.
Blockchain/Cryptocurrency Primer Links
What Is Blockchain Technology?
Wikipedia – Cryptocurrency
BlockGeeks – What is Cryptocurrency: Everything You Need To Know (Ultimate Guide)
Bitcoin: The Ultimate Guide For Beginners
MIT Technology Review – Cryptocurrency
Hot Hardware – Cryptocurrency Valuations Hit All-Time High Surpassing $100 Billion, Ethereum And Bitcoin Lead Charge
TechCrunch – What the hell is happening to cryptocurrency valuations?
Bloomberg Technology – These Companies Stand to Gain the Most From the Cryptocurrency Rush
The Atlantic – The Rise of Cryptocurrency Ponzi Schemes
Cryptocurrency Investment Guide: Momentum and RSI
A letter to Jamie Dimon — and anyone else still struggling to understand bitcoin and cryptocurrencies