Are Security Tokens Living Up To The Hype?
VC's and IEO's are stealing the show
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Remember 2018? Time was when you could buy a decent car with a single bitcoin, or a beater for an ether. Everyone was ready to get crypto-rich, and even ICO’s were to be redeemed by a new financial vehicle: the Security Token Offering.
STO’s emerged from the regulatory uncertainty of 2018, as the SEC-friendly younger brother of the near-dead ICO. At the start of this year, a slew of pieces in the crypto press predicted that 2019 would be the “year of the STO.” Crypto Briefing even reported one former JPMorgan trader stating in November last year that:
“The [STO] market can expect well over a billion, and anywhere up to $2-3bn in issuance in 2019.”
The year isn’t over until someone sings “Auld Lang Syne,” but we’re nearly two-thirds of the way through. So what’s up with blockchain funding, in the ‘Year of the STO?’
Blockchain Funding in the STO and IEO Markets
At present, the $1bn prediction appears to be a little optimistic. When PwC released its global blockchain strategy and ICO report in June, they showed that STO’s have raised a collective total shy of $250m. Extrapolating outwards, STO’s will be lucky to hit half of that billion-dollar prediction.
However, the initial exchange offering (IEO) is telling a different story. At this point in 2019, the IEO market is proving far more active. This year has seen dozens of completed IEOs, 13 of which closed after raising more than $10m. The biggest was when Bitfinex launched its LEO token, which raised a whopping $1bn worth of USDT.
In other words: a single IEO is likely to outperform the entire STO market, and probably several times over.
It’s difficult to pinpoint exactly why the STO markets are proving to be so sluggish. The ongoing regulatory uncertainty in the US, the smaller pool of accredited investors, and the lack of regulated secondary trading are all possible culprits. That doesn’t mean it won’t pick up pace in the future, but for now it’s clear that the STO isn’t living up to the hype.
What’s In Store For Investors?
For big investors, there’s no reason to choose an IEO over an STO. Although most jurisdictions have high restrictions on securities trades, they’re ultimately just two different mechanisms for bringing a token to market.
However, at the end of July, a very interesting piece of research was released to very little fanfare. But it could prove to be significant for anyone interested in investing in blockchain startups. It was a study conducted between Trier University in Germany, Erasmus University in Rotterdam and UCLA.
The question posed by the study was: “How does VC financing influence a blockchain technology-based firms (BTBFs) performance, post-token offering?” The study covered 2,905 ICOs, which is a significant sample size even in the crowded ICO market.
The high-level findings showed that “VC-backed BTBFs have a statistically and economically significantly higher post-ICO performance” than those backed by retail investors. The report also found that potential for growth, utility, and profitability all ranked higher for firms backed by venture capital.
Why is this? According to researchers, it’s not because VC’s have a nose for sniffing out a good investment. Rather, the study suggests that it’s a treatment effect as opposed to a selection effect. The involvement of a VC post-token offering adds enough value to the project to help it pull ahead of its retail-backed cousins in terms of growth, use case, and profitability.
This value derives from a combination of expertise, and having an invested party holding startups accountable for delivering returns.
But I’m Not a VC…
Understanding this value-add from a VC doesn’t mean that the average investor needs to go out and become a VC to participate in the profitable blockchain funding game. But knowing that VC-backed projects have an edge could be a useful insight.
If you’re of a more passive mindset, then there’s also the option of seeking out a VC fund that’s open to individual investors. Many funds, such as Pantera, insist on a minimum investment that can stretch into six figures, but some others are open to mere plebians. Tokenized funds are also becoming more prevalent in 2019, such as Hack Fund, Spice VC and Swarm Fund.
Of course, none of this is investment advice and we make no comment on any of the funds mentioned here. You should always do your own research before making any investments in an STO, IEO or venture fund.