Initial Coin Offerings (ICOs) and altcoins are economically unviable, said BnkToTheFuture CEO Simon Dixon in an interview this week. His opinion is notable, as he and his company previously invested in and heavily promoted the technique.
StartJOIN, Startcoin, and the Players
At issue was Dixon’s investment history with BnkToTheFuture and specifically that company’s involvement with StartJOIN and its token Startcoin.
BnkToTheFuture is a VC company that invites investors to join in funding startups in the Bitcoin/blockchain space. Its notable stakes include well-known names like BitPay, Kraken, ShapeShift and Stork. Dixon co-founded the company in 2011 and launched it in 2014.
One of BnkToTheFuture’s first clients was a crowdfunding platform called StartJOIN, founded by TV personality Max Keiser and Jamie Scott. Together they launched the Startcoin token as a means to crowdfund other startups.
Startcoin’s value has seesawed between extremes. It went from a $100,000 USD market cap in January 2015 to $5.1 million in July that year. However in 2017 it slumped to the $200,000 range and is currently $1.37 million. Meanwhile, StartJOIN itself never really featured any well-known or well-loved companies.
Former Crowdfunding Proponent
“I was really pushing the concept of what crowdfunding could do for the economy, what crowdfunding could do for the world,” Dixon said. “At the time, I really thought (Startcoin) was a good idea. I wasn’t familiar with the economics of altcoins … but this seemed like an interesting concept that caught my imagination at the time.”
He said his stance has since shifted completely:
“Since my involvement, anything that we’ve been involved with that has something to do with an altcoin has caused us exponentially more grief than the other things we’ve dealt with.”
Dixon said he still believes in Bitcoin and believes it has different economic fundamentals to altcoins. He pointed to altcoins’ extreme price volatility as a major reason for their unsuitability for startup fundraising.
“The economics just don’t make sense. And that’s why crowdfunding and and altcoin just don’t work.”
What Happened to Startcoin’s Other Leaders?
So what happened to Max Keiser and the other project leaders? Dixon admitted Keiser had stopped responding to his communication, so was unsure of his status. He noted Keiser was not involved with BnkToTheFuture itself, but had promoted it (and Startcoin) in the media.
Keiser and Dixon also started a venture called Blockchain Capital, though Keiser handed his share over to Startcoin at some stage.
Co-founder Jamie Scott also left the project, and investor Karl Gray is the current CEO of Startcoin Holdings. The project entities still operate on some level, but The “Startcoin community” has been highly critical of Gray’s actions — past and present.
DeRose pointed out the irony that Keiser praises cryptocurrency for freeing ordinary people from bankers’ bad behavior — but had become involved with multiple failed altcoin projects, including Startcoin and the earlier Maxcoin.
What Are ICOs and Why Are People Skeptical?
ICO proponents praise the method as a groundbreaking new way for startups to raise money. Generally, new companies must raise money from private venture capitalists, and/or sell shares to local investors on a regulated market. Both are difficult, costly and time-consuming.
Conversely, the ICO way enables anyone capable (or incapable) or building a blockchain token to sell those tokens to speculators for existing currencies. Startups and their founders may also hold a large portion of their own tokens. Everyone holding the tokens lives in hope that their value will skyrocket, providing a massive windfall.
To date, though, such occurrences have been infrequent. Most “altcoins” launch with a big bang of publicity and value surge, only to crash after investors take profits and never rise again. Some, like Startcoin, have multiple peaks. But the value did not grow and hold over time as investors hoped.
It doesn’t happen in every case, but there’s a definite pattern in the value trajectory of most tokens created as ICOs. Some note that even bitcoin has followed a similar path. As Dixon noted, this is problematic both for third-party investors and companies trying to make money by selling their tokens. Many turn to social and other media in an attempt to gain attention and drive up value.
On a regulated stock market this practice is called a “pump and dump”. However the SEC currently does not recognize blockchain tokens as shares, and similar practices go on unmolested by authorities.
Lack of Regulation in the Crypto Industry
DeRose asked Dixon whether this project would have been possible in a regulated investment environment. While Dixon claimed BnkToTheFuture is indeed regulated, aspects of the StartJOIN project seem unbelievable to outsiders.
For starters, in a regulated environment there are requirements for due diligence on management and founders. To be unsure of someone’s background, or have founders simply walk away from a project leaving others to explain, would be unthinkable. Or at least, there would be legal repercussions.
There are also, as DeRose noted, layers of obfuscation — what is a company, how many entities exist, which one owns what, and which individuals are involved officially with each? In the interview, he struggled to keep track.
Founders who create digital tokens and then leave the teams are a favorite DeRose target — or as he calls the practice, “turning the project over to the community”.
He questioned why, as a VC, Dixon is now left to explain things as Startcoin’s public face. Dixon faced personal, financial and business risk in becoming involved, DeRose added.
Dixon also noted this was a problem unique to cryptocurrency. If you start a company there are legal processes to wind it up, he said, but a cryptocurrency is by design supposed to last forever. To date there is no graceful or specified legal method to end a cryptocurrency.
What Does This Mean for ICOs in the Future?
All this activity, plus a myriad other altcoin projects and ICOs, raise some big questions: will the authorities step in to regulate the cryptocurrency and ICO market? And if they do, what will the consequences be for past and current participants?
Several commentators have noted how their involvement in the Bitcoin/crypto world has given them a newfound respect for regulation.
Cryptocurrencies and blockchains were supposed to give regular people the chance to become VCs. But seeing naive retail investors repeatedly lose their savings, while project leaders sell their holdings for large profits and simply move on to the next one, makes observers wonder if either parties should be involved in investing at all.
Libertarians argue everyone should be free to invest their own money however they like. That ethos still dominates the cryptocurrency and ICO space. In the future, however, the powers-that-be might not see things the same way.
Especially if, as Dixon said, ICOs as a funding mechanism “just don’t work”.
Have you ever invested in ICOs? What was your experience? Please share it below.
Images via Pixabay, BnkToTheFuture, BraveNewCoin, Bitcoin Uncensored