How’s That ICO Working Out?

December 14, 2018
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(Bloomberg Businessweek) — Hdac Technology AG is a new, mostly unknown company, with no commercial products to speak of and no paying customers. But earlier this year, the Swiss startup joined Adidas, Nike, PepsiCo, and other global giants as an advertiser during broadcasts of the 2018 FIFA World Cup.

This followed a frenzy of excitement over initial coin offerings, or ICOs. Startups created and then sold their own digital tokens, raising $6.58 billion in 2017, according to CoinSchedule Ltd., which analyzes the category. Investors in Hdac bought tokens, which the company said could be used in its product in the future, hoping for the kind of huge returns Bitcoin delivered to those who got in early. In 2017 some 6,200 individual investors paid 16,786 Bitcoins for the company’s tokens, worth more than $300 million at Bitcoin’s peak price that December. Hdac’s was the richest ICO of 2017, according to CoinSchedule’s data.

The money didn’t last long. The price of the company’s token is down 40 percent for investors who participated in a special presale. It’s down 80 percent for those who bought into the regular ICO. And although some companies converted the Bitcoins they’d raised into dollars, Hdac decided to ride out the boom. As a result, the value of its holdings has fallen more than 80 percent from the peak. The 50-employee company has also spent about half of the funds, according to Chief Operation Officer John Sang-ug Bae. He says Hdac is making progress, but in an Oct. 7 blog post, the company’s chief planning officer, John Woo, asked investors to be patient. “Honestly speaking,” he wrote, “the way ahead of us does not seem short and easy.”

The same could be said for ICOs in general. The category is under scrutiny from securities regulators around the world—which seems justified given that more than half of all token projects die within four months after their sales, according to a Boston College study. And research published by crypto consulting firm Satis Group suggests that about 80 percent of ICOs were outright scams. Other ICOs might be described as merely colorful. One of the largest 2018 offerings, Dragon Corp., had ties to former Macau organized crime figure Wan Kuok-koi, better known as Broken Tooth, according to the South China Morning Post. The founders of BitConnect, which at one point had a market cap of $1.5 billion, simply vanished after receiving cease-and-desist letters from regulators in the U.S.

Funding is finally slowing down. “I think this whole craze is over,” says Lucas Nuzzi, of Digital Asset Research Inc. “It’s painful for a lot of people, but it was inevitable to begin with.”

Funds raised: $4.2b
Return: -60%
Remaining crypto wallet balance: $0*
How it describes itself: “The most powerful infrastructure for decentralized applications”
Notable backers: Block.one, Connect Capital
Red flags: No one is sure what parent company Block.one has done with its funds. The startup, which declined to comment, lost core team members, and some have raised questions about EOS’s governance.

Funds raised: $1.7b
Return: Token not available yet
Remaining crypto wallet balance: Unknown
What it is: A way to exchange money in a private messaging app
Red flags: The money raised may be used for the messaging service instead of for new products. Many investors doubt that the technical feats Telegram promised are possible with blockchain technology. The company could not be reached for comment.

Funds raised: $735m
Return: Token not listed on independent exchanges
Remaining crypto wallet balance: Unknown
How it describes itself: “Sovereign cryptoasset”
Notable backer: Venezuelan President Nicolás Maduro
Red flags: Critics call the government-issued coin a scam. Maduro has said the Petro will ensure Venezuela’s financial independence.

Funds raised: $575m
Return: -94%
Remaining crypto wallet balance: Unknown
How it describes itself: “Social entertainment on the blockchain”
Notable backers: Polymath Capital, BlockTower Capital
Red flags: The project promises users will get premium video content for free. The company has a development deal with Johnny Depp.

Funds raised: $420m
Return: -98%
Remaining crypto wallet balance: $0*
How it describes itself: “The entertainment token”
Red flags: The project is linked to organized crime, according to the South China Morning Post. The company could not be reached for comment.

Funds raised: $258m
Return: -77%
Remaining crypto wallet balance: $36m
How it describes itself: “IoT contract & M2M transaction platform based on blockchain”
Notable backers: Hyundai
Red flags: As of October, Hdac didn’t know enough about 30 percent of its investors to meet regulatory requirements. It says it’s now compliant.

Funds raised: $257m
Return (futures): -72%
Remaining crypto wallet balance: $19m
How it describes itself: “A blockchain-based storage network and cryptocurrency”
Notable backers: Sequoia, Union Square Ventures, Boost VC, according to Crunchbase
Red flags: The tokens have yet to be issued, as the network is not yet up and running—and likely won’t be until the second or third quarter of 2019.

Funds raised: $232m
Return: -78%
Remaining crypto wallet balance: $18m
How it describes itself: “A new platform for smart contracts and decentralized applications”
Notable backers: Polychain Capital
Red flags: The project is facing class-action lawsuits and has been rocked by infighting among core team members.

Funds raised: $183m
Return: -97%
Remaining crypto wallet balance: Unknown
How it describes itself: “Revolutionizing the cannabis industry”
Red flags: In November the company settled with the U.S. Securities and Exchange Commission for issuing tokens that the regulator deemed to be securities. It had to not only pay a penalty, but also refund some money to investors.

Funds raised: $158m
Return: -94%
Remaining crypto wallet balance: $373k
How it describes itself: “Leading the crypto revolution”
Red flags: The company lost a lot in the crypto crash but still has enough money to keep operating for at least 12 months, says its CEO.

Funds raised: $153m
Return: -88%
Remaining crypto wallet balance: $3m
How it describes itself: “Redesigning the way people create and share value”
Red flags: A Cornell researcher said the company’s market-maker approach is flawed and will always trail the real market. Bancor disputes the research.

*A crypto wallet balance of zero doesn’t necessarily mean the company has no money.
Data: Funds raised from Jan. 1, 2017, through Nov. 28, 2018, according to Coinschedule; returns through Dec. 11, as calculated by CoinMarketCap; wallet balances as of Dec. 3 at current prices, compiled by Elementus; Hdac self-reported its balance to Bloomberg on Dec. 11.

To contact the editor responsible for this story: Pat Regnier at pregnier3@bloomberg.net, Max Chafkin



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