Last year, $5.6 billion was raised in initial coin offerings. Makes you wonder how many ICOs have made money for investors, does it not?
In February, Bitcoin.com, a popular cryptocurrency web portal, found that 46% of last year’s 902 ICOs are already dead. Editors classified another 113 as the walking dead, businesses merely going through the motions, waiting to die.
Quite simply, there is way more risk that most understand. Many ICOs are blatant frauds. They had no chance to ever build lasting businesses because the architects had no interest in construction. Others were designed to offset all of the risks, to unsuspecting investors.
Most operating businesses are funded through either equity, debt, or some combination of the two. In the former, the enterprise gives up voting rights and cash flow rights. In the latter, the business pays interest, usually to a bank or bondholder. An ICO is neither of these. The enterprise is effectively raising capital from its customers. The only way for the ICO buyer to win is if the value of being a customer increases. Building a great business helps, but controlled scarcity is the key. In theory, blockchain, the open ledger system that underpins every ICO, brings complete transparency. And smart contracts, another feature of the ledger, brings scarcity.
In practice, there is no way to make certain any of that protective infrastructure ever sees the light of day.
ICOs remain largely unregulated. There is nothing to stop charlatans from making unrealistic promises, and slinking away with investors’ capital in the dead of night.
Thankfully, government regulators are coming. The sole mandates of the Securities & Exchange Commission and the Commodity Futures Trading Commission are to protect investors. This week, the Department of Justice launched a criminal probe into bitcoin price manipulation.
Earlier this month, The Wall Street Journal reported Telegram, the Russian company behind the encrypted messages application of the same name, was killing its plans for a public $1.7 billion ICO.
Earlier this year, the company raised $850 million from private investors to develop Telegram Open Network, or TON — a grand vision that would transform its messaging service into a platform, complete with payments, file storage, decentralized and censor-proof apps.
That was before the SEC started poking around in the details. It’s easy to understand the appeal of ICOs to enterprises. They’re a very cheap way to raise capital. Initial public offerings, in contrast, exact a 7% commission from underwriters and issuers are often coerced to discount the initial share price to ensure demand. Then there are the ongoing increased compliance costs associated with public companies. ICOs, conceptually, are a good idea. The problem is too little oversight.
That combination means investors should avoid all ICOs for now. Telegram Open Network is a pretty good idea. If that project can’t stand the scrutiny of the SEC, it’s hard to imagine many that can. And when the fraudsters are exposed, the odds are a secular decline for digital coins will take hold. Many coins will ultimately trend toward zero.
However, blockchain will live on.
Accenture (ACN) is not the first name that may come to mind when thinking about blockchain. What makes the consultant attractive in the space is its reach.
Blockchain is going to be an important new part of the digital economy. Many corporations will experiment with new applications. They will all need consultants for implementation. Accenture has ties to 95% of the Fortune 100, and a big global footprint.
The stock trades at 27-times trailing earnings, which is rich but also signifies Wall Street’s respect for its consistency. Sales have increased every year since 2013. In 2017, revenues grew 5.6% to 36.7 billion. It’s buyable on its regular pullbacks.