2017 - the year of the initial coin offering

Philipp Pieper

Philipp Pieper

There’s been much hand-wringing by wealth advisers over skyrocketing initial coin offerings (ICOs) in 2017, and for good reason.

Through the end of November, ICOs raised more than $3.6bn (£2.7bn), according to CoinDesk, a crypto currency data tracker.

ICOs are essentially loosely regulated crowdfunding campaigns.

Companies issue digital tokens, which investors buy using crypto currencies, such as bitcoin or ether. The tokens can be used to purchase future products or services from the company, or be traded with other people.

According to the Financial Times, 587 ICOs launched in 2017, but only 54 per cent were successfully completed, with some disappearing altogether. The frenzy prompted China and South Korea to ban ICOs completely, while the US and UK have increased regulatory scrutiny of ICOs.

Yet, with bitcoin valued at £13,000 ($17,000) on 12 December, clients are increasingly voicing a desire for wealth advisers to manage crypto assets on their behalf. It’s a trend that’s unlikely to reverse soon.

While that may only deepen advisers’ furrowed brows, none of this means the amount of capital flooding into the sector is unwarranted.

In fact, there is a way to reconcile the events of 2017, which may ultimately be known as the year of the ICO, with established technology business and investment use cases.

Just as the dot coms proved that there can be tremendous value creation – as well as heart-stopping losses – when massively disruptive technologies become mainstream, that may very well be the case for 2017’s ICOs.

We are still very early in the game. While many people are now familiar with bitcoin and ethereum, far fewer could name even one of 2017’s top ICOs.

But many of those companies are now busy building the new platforms that the next generation of blockchain will run on.

Just as the HTTP protocol needed to be developed before web browsing and e-commerce could proliferate, next-generation blockchain companies are taking what was created before – tokenisation via bitcoin, and smart contracts via ethereum – to build completely new business models.

Swarm Fund, which gives individual investors access to institutional investment classes, is just one example.

Instead of creating a token out of thin air, it takes something that already exists – such as a piece of property or a percentage of a real-world company – and 'tokenises' it so it can be traded, much like a traditional share of stock.

In doing so, it provides an avenue for wealth managers to satisfy their clients’ desire to include crypto assets in their portfolios, while putting money to work in the much more familiar world of institutional investment, albeit without high investment minimums, or restrictive investing time horizons.

There are hundreds of other companies doing similarly innovative things in other areas.

It’s the reason why, when all is said and done with 2017’s ICO class, that US$3.6bn (£2.7bn) may be nowhere near enough.