Bitcoinist spoke to Shelly Hod Moyal, iAngels' founding partner and co-CEO, about why the ICO market exploded and where the cryptocurrency industry is heading next.
Shelly is a Hunter College and MBA graduate of Kellogg. He is a recognized fintech and blockchain expert and a sought after expert at international conferences on Israeli technology investments. She is a board member of several iAngels portfolio companies.
Bitcoinist: Why did the ICO market experience such a hype in 2017?
Shelly Moyal: This is a loaded question and there are some things that you need to unpack. First, most emerging technologies experience hype cycles in which technology is one step ahead of technology, but there are a few things that make the ICO boom and bust unique.
The two main distinguishing features were 1) the participation of retail investors and 2) the liquidity of the assets (ie the ability to trade these assets on stock exchanges). Most hype cycles go unnoticed as they are primarily experienced by venture capitalists and, due to illiquidity, gradually implode over several years over several months as VCs hide behind book values more easily when market price information is not available.
Before embarking on the hype that has been fueled by many BS and speculation, I think it is important to convey the idealistic background that awakens interest in technology.
There is a growing disillusionment with traditional institutions that are centrally controlled and therefore prone to mismanagement, exploitation, failure and moral hazard.
Bitcoin has shown the world that it is possible for a group of strangers to reach consensus without anyone controlling the system. This unique feature of "programmable trust" has sparked the interest of some scientists and entrepreneurs who could imagine the possibility of creating numerous applications on this basis.
The best-known project for building infrastructure for such applications is Ethereum. Similar to Bitcoin, the infrastructure is an open source protocol. It is possible to participate in the project by acquiring the access token Ether. Bitcoin and Ethereum are both early examples where technology meets capital in the sense that you, as a user as well as an investor, can buy a token that allows virtually anyone to invest without restrictions.
The way in which protocols (such as Ethereum and Bitcoin) create incentives for acceptance consists in their access token, which has speculative value. As the network grows, the value of the token increases.
In 2017, the generated assets of the early Bitcoin and Ethereum investors were easily split into other start-ups (mainly ICOs) that would build the ecosystem for further capital gains. Hundreds of thousands of people around the world have witnessed how early investors in Bitcoin and Ethereum made an incredible 1,000x + gains and wanted a slice of it.
Entrepreneurs started writing logs and took over ICO's crowdfunding tool to create millions of dollars of untaxable capital for their startups. Prices were significantly better than before given the lack of prudential guidance and supervision of these brands, as well as the lack of institutional investors balancing the price levels around fundamentals, which led to a big boom and a subsequent collapse.
Why did it crash in 2018 later? Regulatory Measures Lower Bitcoin Price? Or a combination of factors?
The "crash" was the result of 1) the disillusionment of investors and 2) the regulatory restraint.
The bulk of investment activity was driven by speculation and price movements were affected by illiquidity and sometimes by market manipulation. Since all projects were early-stage start-ups that have not yet created value (a product and a network), it has been impossible to justify billions of dollars in valuations.
The fact that many projects also proved fraudulent did not help, and the high demand for these assets gradually faded in the course of 2018.
Moreover, there is no coherent business model for these symbolic investments. In other words, it was (and still is) unclear how the early investors in these networks will bring value. Most of today's projects do not have a token model that effectively aligns incentives between users and investors. There is an inverse relationship between speed and network value.
In other words, the more hands the currency changes, the lower the rating of the network, because if supply meets all demand, there is less scarcity. So a successful product can still lead to a low value that the owners of the tokens charge. Today, many projects are experimenting with various token models such as mint and burn, governance, work tokens, TCRs, etc., which are expected to increase token's value, but these have not yet been proven.
As regulators, notably the Securities and Exchange Commission (SEC), clarified that most token sales (according to the Howey test and Hinman's guidance) were considered security offerings and began investigating projects that carried out an ICO, more and more decided Entrepreneurs not following the ICO path As they realized that their tokens would be considered non-compliant securities.
Which lessons were learned last year?
There are no shortcuts to creating a startup, even if it is decentralized. It takes time and for that reason risk capital can not be completely replaced. The idea that startups trade in a liquid market is theoretically very nice, but there is no reason for startups that have nothing to do but a team and the idea of trading in something much more than zero.
Even if startups earn money for a given valuation today, it does not mean that someone is ready to buy the startup at that price the next day. This pricing is just a mechanism for building partnerships between entrepreneurs and investors and not indicative of a true fundamental value.
This brings me to another lesson in the importance of governance. The lack of self-governance of these startups requires regulation and corporate governance to protect investors and consumers until these networks can truly and fairly govern.
Between 2017 and 2018, the ability of entrepreneurs to raise money without restrictions led to massive abuse that in many ways harmed the industry.
Ironically, this has led to a poor perception of the movement, which has essentially been aimed at building a better world with financial inclusion and more cohesive businesses built on the values of fairness, transparency and decentralization.
Why do you think the STO can replace the ICO?
We do not believe that STOs will replace all ICOs. STO is a broader category. In fact, decentralized projects / utility marketer projects can also use this path, but STOs are simply a capital market development that allows us to label all types of assets. STOs will play an important role in the future economy as they provide an infrastructure for trading and reduce inefficiencies in the current financial markets through disintermediation.
STOs are based solely on regulatory compliance and review. How can this crowdfunding model attract the same number of people as the relatively non-legitimate ICO model?
It can not and should not. By definition, STOs are subject to national securities laws and are therefore treated as the issue of traditional securities such as stocks and bonds. As a result, the universe of investors is limited and those who choose to market to the general public must comply with strict and expensive regulation similar to that required of companies seeking to go public.
STOs will therefore be more likely to follow the trends and cycles of the underlying token financial instruments than those of the recent ICO bubble.
How does your company iAngels help these projects manage their capital?
We help them just as we help our other startups in different areas. Investing in startups is a long-term partnership, and we strive to provide our entrepreneurs with all the support they need, be it in business development, fundraising, marketing, finance and / or strategy.
In which projects did you invest recently?
An interesting project is Spacemesh, which tries to create more fairness through a consensus mechanism: Spatial Proof (PoST). Storage space is used within the PoST as evidence for the verifier (as opposed to proof-of-work computing).
Although nobody prevents anyone from buying large amounts of storage space to increase their influence on the consensus. However, these actors have scale inequalities and such behavior is therefore not economical. As a result, unused space on home computers can contribute to consensus. If the technology works, the degree of decentralization can be high at low energy costs.
As you mentioned earlier, most of these projects experiment with new token models and create apps on undetected block chains. Would it not make sense to use the largest network effect, d. H. Bitcoin, rather than trying to rebuild their underlying digital value networks from scratch?
Yes, in any case. In fact, over the years, Bitcoin and Ethereum have built strong networks with large developer communities, and there is plenty of room for innovation in the higher layers. In fact, we've already developed several projects over the last year that have built promising applications on these blockchains, especially Ethereum, for example, Maker Dao and its Stablecoin Dai.
However, as there are different types of applications, we believe that there is no uniform size for all blockchains, and there is room for other innovative and novel blockchains (eg, faster, more secure, more decentralized) that also act as guides for can turn out certain applications.
What is currently the biggest obstacle to the introduction of cryptocurrency?
We believe that the main obstacles are technology and regulation. Technically, the stack is not sufficiently developed to create scalable and easy-to-use distributed applications (dApps). Currently, only tech savvy people interact with them.
For example, to interact with a dApp, you must download the Metamask Browser Extension, create a wallet, and fund it with Ether purchased from an Exchange or Broker. This is a lengthy process before you can ever interact with a dApp. To achieve acceptance, the blockchain must work as seamlessly as the applications used today. This will take some time.
We are still at a point where entrepreneurs need to break through on the first levels of technology infrastructure.
It will take time for Crypto to feel like Visa or Mastercard, which are high on the technology stack. Imagine the Internet in front of broadband and mobile, much less useful.
Regarding regulation, it is important for entrepreneurs and users to have clarity about the regulatory treatment of these assets that they do not have today. Therefore, participants in the technology are exposed to potential legal and regulatory procedures. This veil of uncertainty prevents most risk-averse people and institutions from adopting the technology.
What options does the industry offer?
Today, the market has changed, and what was possible in 2017 is not possible today. So what we still have is the biggest opportunity this time for the industry.
Talented entrepreneurs and groups sit on cash, have plenty of time to work, and focus on shipping rather than the next VC round. This is a significant advantage as VC entrepreneurs typically spend 18 months collecting money, and if they do not reach their milestones, they are often out of business.
By eliminating this "timing risk," a team of talented employees will theoretically have a greater chance of success. If even a few blockchain projects will add value, this will be a big win for the industry.
What do you think of Shelly's view on digital token regulations? Share your thoughts below!
Images courtesy of Shutterstock, iAngles.com
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