Initial Coin Offerings Are the New IPOs to Watch
Ten years ago, a software startup founder named Mike Walsh had a 15-minute meeting that changed his life forever.
The man he met with, Ryan Graves, was a friend of one of Walsh’s employees. Graves was looking for advice on whether or not he should join a new startup called UberCab.
When Walsh heard of this new company, he immediately saw the potential for a taxi platform to improve on existing car services. After all, he said, you “wait 45 minutes for a taxi, and then they cancel on you.”
Not only did Walsh encourage Graves to take the job, but he also agreed to invest $10,000 in this new taxi startup.
As Walsh later recounted, he figured the “worst-case scenario” for UberCab was that “somebody would buy this thing.”
Last year, Walsh’s wildest dreams came true: The taxi startup, now called Uber Technologies Inc. (NYSE: UBER), went public at an $82 billion valuation.
Walsh’s investment in the startup became one of the best investments in venture capital history. His $10,000 investment was worth over $100 million in less than a decade.
There are plenty of Silicon Valley stories just like Walsh’s.
In the last decade, it’s happened over and over for early-stage investors in companies such as Facebook, Airbnb and Uber.
Of course, the investing public doesn’t have access to these kinds of deals.
You either have to know someone or be a well-heeled venture capitalist with access to these early-stage investments.
We only get to buy at the initial public offering (IPO) when the “big money” is selling.
They get the feast while we get the scraps.
Now, cryptocurrencies are turning the tables on Silicon Valley.
These decentralized assets thrive on widespread ownership, and they allow users to take an early-stage investment stake.
A New Way to Reward Early Adopters
If you bought a new version of bitcoin that launched today, would you rather have 10 investors or 10 million investors with access to your new token?
With initial coin offerings (the crypto version of the IPO), everyone has access to the same early-stage investment at once.
It’s better to have as many investors as possible take ownership in a new token. This establishes a larger network effect, and the token holders become users.
That’s why decentralized exchanges such as Uniswap and 1inch “airdropped” tokens to users.
If you had been using their service before a certain date, they gave you free tokens when they became available. This rewards early adopters for using the service.
In September, any investor that had previously used the Uniswap exchange was given 400 UNI tokens.
At the time, the tokens were trading at $6 (they’re priced around $4 now). So, even if you had only used Uniswap for a $20 transaction, you still received $2,400 in tokens when the airdrop occurred.
On Christmas morning, 50,000 users of 1inch were given 6% of the initial supply of 1.5 billion 1INCH tokens.
At a current price of $1.16, that amounted to over $104 million in free tokens or about $2,088 per user.
Crypto Holders Naturally Become Evangelists
In the next few years, we are likely to see decentralized social networks pop up to compete with Facebook and Twitter, where users are compensated for using the service.
The tokens users receive will accrue value as they encourage their friends to join.
That’s the story of bitcoin’s rapid adoption. As bitcoin holders realized that a bigger network meant a higher price, they naturally became evangelists.
This is the strong incentive mechanism built into all crypto protocols.
Keep in mind, all of these projects are in the very early stages. And while a few will create staggering returns for investors (as some already have), there will be many more that fail to gain a large enough network to accrue value.
But at least we’re now afforded the opportunity to invest in the very early stages. In this way, service users will participate in the growth of fast-growing companies.
Editor, Automatic Fortunes
My career on Wall Street started while I was in college. I spent a summer interning for Merrill Lynch in the middle of the ‘90s bull market. I was fascinated with trading, and as a result, after college, I joined Salomon Brothers in the famed mortgage bond trading department. Later, I spent time at Citigroup working with credit derivatives. Eventually, I needed to walk away from the excess of Wall Street. That’s when I joined Banyan Hill in 2017. Now I help readers get ahead of the market and build their retirements.