Here is the thing.
About 228 Blockchain startups have collectively raised over $3.6 bln as of Oct. 16, 2017. A huge portion of these ICOs was to raise funds for companies that haven’t started operations yet. A whitepaper and template website, and in some cases high-profile advisors, are all a majority of these Blockchain startups have. And the fact that people are willing to invest in such opportunities speaks to an underlying hunger that the 21st-century investor has for investment opportunities that promote fairness, improved transparency and accessibility.
But with this industry yet to be regulated, mostly because they promote the use of cryptocurrencies, which are also unregulated, investing in a project based on promises in a whitepaper is risky. With the present structure of fundraising based on a whitepaper, it will be difficult to make Blockchain-based investments go mainstream. Even the co-creator of Ethereum thinks 90 percent of ICO project will eventually crash. Most investors out there want to understand what they’re investing in, see reasonable proof that the business is well placed to be successful over the long haul and have more assurance on how the funds invested will be used.
We simply need to rethink the way we do ICO today to improve its public acceptability.
There might be a way.
The easiest way to explain the idea of an ICO is to liken it to an Initial Public Offering, or IPO However, unlike an IPO, an ICO doesn’t necessarily confer ownership rights on buyers of the ICO tokens. In essence, while buying a share of a company during an IPO would mean that one owns a unit ownership in the company, buying a token during an ICO doesn’t give you any form of ownership nor voting right. What this means is that there is no clearly stated procedure for how a Blockchain startup will distribute its profits among token holders in form of dividends. In most cases, ICO is an invitation to put your money into an idea, hope that it will be adopted hence, seeing the value of the token rise on increased demands. This contributes a big deal to why crypto tokens are volatile.
Seeing that traditional investors are already used to investing in a company for an ownership stake in the company, it’s plausible that structuring ICO tokens to confer ownership and voting rights could attract the mainstream investors. The smart contract technology makes it possible to develop a “multi-utility” token that would contain information on what kind of ownership each token possesses. This is exactly what Swissborg is trying to do. The idea of integrating a crypto token into a cooperative system finds its root in the fact that a cooperative and the Blockchain technology shares similar tenets of fairness, transparency, accessibility and democracy. With a token like the CHSB, holders will be entitled to receive a share of the revenue generated by the cooperative.
Let’s face it, with traditional equities investing, most people lack the skills and access to information that would enable them to invest smartly.
The lack of skill and access to information deepens when Blockchain investments are involved. This creates a need for Blockchain-based mutual funds and hedge funds that help investors who do not have the time, skill and information to optimize their investments. Funds come with a certain trust level because investors believe professionals who understand the market and have more information than they have usually handle them. And since funds typically have their own skin in the game in that they make money based on the performance of the fund, investors feel a tad more comfortable.
There are existing cryptofunds that are already doing their part in instilling confidence in the crypto-investment space, but there are still some things to fix in order to improve investor confidence. For instance, the fund management team usually, by default, owns a portion of the fund tokens. For an industry currently dealing with trust issues, this is a drawback because it creates the fear that founders are all about making money for themselves alone. There’s clearly a need for transparency and Swissborg aims to provide it by distributing all of its tokens to its network. In other words, the management team receives to token allocation, thereby, making the fund a bit more transparent.
Investments refund option might help.
What most ICOs do to improve investor confidence is making the startup team vest their token allocation for a certain period after the ICO. In other words, the team is usually not allowed to sell (dump) their tokens within a period in order to alleviate fears of a pump and dump scheme. The traditional investor wants more security of their investment. One way to make investors feel more secure is to set up ICO token such that investors can get a refund of their investments if certain project milestones are not achieved within a given period. This can be achieved through a code that makes sure that shareholders can vote on the advancement of the Blockchain venture after the ICO. This code, which is available on GitHub, only makes funds raised during ICO available upon achievement of certain milestones.
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