Since its inception in 2009, bitcoin has revolutionized the payments space. It runs on blockchain technology, a system for digital interactions that doesn’t require an intermediary to regulate the transaction.
The configuration of blockchain technology provides both authentication and authorization, which are vital to digital transactions. We see applications for blockchain technology in several important areas beyond cryptocurrencies.
Cryptocurrencies are hugely popular due to their decentralized nature and added anonymity. bitcoin was the first cryptocurrency to be invented and several others like Ripple and Ethereum have since emerged. Ethereum has attracted interest from the financial services industry, as it offers a platform for smart contracts which can be signed and executed in a decentralized and automated way. This is an area that shows great promise and longevity, as do other areas that solve real-world problems and are useful at the enterprise level. Smart contracts eliminate the need to develop a new cryptocurrency for every new application and this has led to the rise of a new phenomenon, initial coin offerings.
ICOs are similar to IPOs, but have specific nuances. The primary difference is that ICOs raise capital by issuing tokens, which grants the "investor" the right to use the issuer’s services or products in the future, whereas IPOs grant ownership shares. ICOs have become increasingly popular as a form of crowdfunding. They effectively allow trading and recording ownership of shares using a trustless, unforgeable, public and encrypted blockchain.
William Mougayar, a leading investor and adviser in the blockchain space, projected that at least 300 ICOs would raise over $600 million in 2017. However, according to data garnered by Coindesk, the second quarter of 2017 alone saw funding in excess of $800 million.
So far in 2017, there have been at least two ICOs to crack the $200 million barrier—Filecoin ($257 million) and Tezos ($232 million). At least four others have raised more than or close to $100 million, including The DAO, which failed to overcome SEC scrutiny earlier this year.
This frenzy has led to the emergence of several specialized and focused players in the ecosystem. Coinlist, for example, is a new exchange that standardizes the ICO process. It offers a relatively streamlined process that aims to attract more sophisticated investors to the digital currency world. Rather than making crypto tokens available to everyone, Coinlist is open only to accredited investors, defined as those who make over $200,000 a year or have a net worth of over $1 million. This exclusivity marginalizes the less sophisticated investors who tend to drive more volatility.
Coinlist also uses a new security protocol called SAFT (Simple Agreement for Future Tokens) that was designed to meet existing securities regulations. Filecoin, a company that enables transactions of unused computer storage among individuals, was the first company to run its token sale through the Coinlist platform.
The heightened interest in the space, combined with the potential for lucrative returns, has prompted fears in some investment circles that we are facing a bubble. Indeed, the bubble seems to have already popped to some extent, with far fewer ICOs hitting their target raises than did just a few months ago.
A total of 97 ICOs were issued in October 2017, with an average raise of $8.55 million, according to TokenData.io. While October was the best month ever for total funds raised, the median amount per token was well below the September 2017 rate of $2.28 million, when 62 ICOs were issued.
As with IPOs, there are several elements that must coalesce to stage a successful ICO. The right timing, valuation, network, and marketing are crucial and often fall under the domain of professional advisers. "The current ICO market is overheated. The valuation is way off. Whether or not an ICO is successful mostly has to do with its timing, not so much “how good your project is," says Eric Gu, founder of Viewfin, a Shanghai-based startup that raised about $2 million in its crowd sale last August. In order for the ICO market to mature properly, qualified advisers will be key to guiding companies through the ICO process.
The blockchain M&A market is certainly in its infancy, but not for long. Since mid-2015, it has averaged only five transactions per quarter. Moreover, 83% of all transactions have occurred between two companies that were both engaged in developing early-stage blockchain-related technologies and products.
A key area of focus for the blockchain M&A market is what type of structure is used for the transaction and how does that impact an exit strategy? Since blockchain M&A transactions are highly specialized, only specialized M&A advisers who are focused on the space are well placed to help companies seeking an exit.
The high level of security offered by blockchain technology makes it well-suited for enterprise adoption. Several companies in the Blockchain space are developing enterprise applications that solve regulatory problems for institutions. Blockchain's strengths are highly attractive to banks, which are dealing with rising costs for maintaining or replacing their aging infrastructure and ensuring compliance with heavy regulatory burdens. According to Santander, blockchain-based solutions could generate cost savings for banks of up to $20 billion per year.
Additional applications for blockchain technology include fintech startups, which are using it to offer services such as remittances and international payments at reduced costs, with greater speed, and with more user-friendly interfaces.
Some jurisdictions, such as Switzerland and Singapore, have shown a relatively open attitude toward blockchain projects, and several startups preferred to launch their ICOs in these markets. This is in stark contrast to emerging markets such as India, where cryptocurrency is viewed with increasing suspicion or China, where ICOs are banned. The market for cryptocurrency will ultimately have to operate under the regulatory frameworks to attract large institutional investment and gain further legitimacy.
Advances in blockchain technology hold great promise for the future. Although, there are obstacles to overcome, a coordinated effort by stakeholders will ultimately transform business as we know it. Bitcoin, the “gateway currency,” is but one application in an enormous pool of possibilities that blockchain technology presents. Institutions, regulatory authorities, and governments around the world must come together and develop an ecosystem that is conducive to both startups and investors.