Stefan Thomas is a well-known figurehead in cryptocurrency circles. This is not only because of his role as Chief Technical Officer at Ripple–it is also because of his bold December 2017 prediction that 2018 would be “the death of the ICO token”.
In CoinDesk’s 2017 in Review, Thomas writes “I expect the exuberance around ICOs to fizzle in 2018. What’s more, I also expect regulators and authorities worldwide to come down hard on fraudulent ICOs in the new year. That’s because many ICOs skirted existing regulation in order to raise equity — with no solid business to back up the offering.”
In one sense, Thomas is correct; some regulatory bodies are taking a tougher stance on ICOs. Yet on the other hand, ICO participation continues to soar. Running 2018 ICO total shows a record amount of ICO investment–almost double that of 2017. Despite Thomas and others’ warnings, ICOs are still a “go to” investment for blockchain enthusiasts. This begs a question about cryptocurrency and blockchain investing in general–what investment options are there for crypto investors, and what benefits do they provide?
One exciting and relatively new option is equity-backed crypto investing. In this case, private equity holders liquidate equity rights for privately held companies through equity-backed digital tokens. In other words, they tokenize private company stock and sell them in the secondary market. One company specializing in this process is Elephant, formerly PrivatEquity. They are developing an enhanced online platform whereby pre-IPO shareholders can sell personal shares in the form of digital tokens in the secondary market prior to a liquidation event (e.g. an exit or an IPO).
The Elephant platform will open up a whole new world for crypto investors–one where digital tokens are equity-backed by solid, developed companies, instead of wild and ambitious startups who don’t even have a roadmap. What’s more, these investments, because they are backed by real companies with real cash flows, are on the conservative spectrum of the crypto investment universe. Because they are tied to company cash flows and earnings, they are much more stable than the run of the mill cryptocurrency. Equity-backed digital tokens are also an excellent way to attract investors who have historically shied away from the blockchain world. Private equity backed assets are typically less volatile than traditional cryptocurrencies but can still provide desirable returns.
Another investment option for crypto enthusiasts is trading major cryptocurrencies. This is by far and away the most common means of crypto investing, and by now many are very familiar with it. Cryptocurrencies are bought in the open markets through exchanges, rather than directly from a company seeking to raise funds like in ICOs. Popular coins like bitcoin and Ethereum fall under this category. Like ICOs, coin trading can be extremely profitable, but also very risky. Those that bought bitcoin and Ethereum in December 2017 on the expectation of doubling their money have been thoroughly disappointed. In fact, bitcoin and Ethereum had annualized volatilities of 95 and 139 percent in 2017, respectively. No matter whom one asks, this is a very risky investment.
A much more removed way to invest in the blockchain industry is through public company stocks. In this scenario, investors who are bullish on blockchains can buy shares of companies like Nvidia, Advanced Micro Devices (AMD), Microsoft, and IBM. Each of these companies has played a vital role in the advancement of blockchain technology. Nvidia and AMD are two of the world’s best chip makers, while Microsoft and IBM both have successful blockchain initiatives.
The downside of buying shares of these companies’ stocks, however, is that blockchain related functions comprise a small amount of company profits. Nvidia and AMD make chips for all types of companies and customers, not just cryptocurrency miners. Likewise blockchain initiatives play a relatively minor role in Microsoft and IBM business models. Shareholders could suffer losses if these major business segments take a hit–regardless of how the blockchain portions are faring.
At the end of the day, investors need to choose whichever option(s) make the most sense for their personal goals and risk tolerance. Elephant’s private equity initiative is a welcome conservative addition to the crypto markets, while traditional investment avenues like ICOs and cryptocurrency trading are popular and lucrative for a reason.
This article was first published on: May 15, 2018