IPO or ICO or IEO (briefing on Colored Coins)

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The new kid on the block is IEO (Initial Equity Offering). I coined that phrase because neither IPO or ICO fits.

– IPO (Initial Public Offering) implies listing shares on a regulated Stock Market such as NYSE, Nasdaq, LSE, SIX etc. 

– ICO (Initial Currency Offering) implies issuing a new Alt Coin. The problem is that Alt Coin are not getting any serious market capitalization. For students of exotica, here is the market cap of the top Alt Coins. The last thing the world needs right now is another AltCoin.

If it is broke, do fix it

A regulated Stock Market is how the market works today. The old saw is if it ain’t broke, don’t fix it. The corollary is if it is broke, do fix it.  Here are the 4 big flaws with these legacy Stock Markets: 

  • legacy listing processes: post Enron, the SEC (followed by other Exchanges) layered on lots of expensive process to protect investors from scams, all of which were based on manual processes (which later got automated but they were still not native digital ie they were expensive and inefficient).
  • national boundaries: it is too hard to discover stocks on exchanges in local markets, so they either suffer a valuation discount or seek a listing on one of the global exchanges (where only mega-sized companies can do an IPO). (See here for our other coverage of this issue).  
  • declining revenue line from listing fees: Stock Exchanges increasingly make their money from selling data, co-located servers for HFT and payment for order flow. This leads to misalignment of interest with the two customers who matter – issuers and long term investors.    

This post, earlier this week by Efi, describes how things went wrong at traditional regulated stock exchanges.

Why Microsoft did an IPO

They did not need to raise money – they were already profitable. They wanted liquidity and price discovery so that they could motivate employees with stock. That is the function of a public market. Any public market 2.0 initiative has to bear that in mind. Investors want to buy shares of profitable business. Uber’s $66 billion valuation in private markets is being questioned because investors cannot figure out how they still lose money after having got to such scale. Then consider a bootstrapped business such as Microsoft at their IPO 25 years ago or a Mittlestand company in Germany. As an investor, which do you prefer to own? That is what the Innovation Capital business should be serving and is not.

Colored Coins 101 for business people

Part of our mission at Daily Fintech is to demystify jargon that obfuscates. We translate Fin for Tech and Tech for Fin. In this case we are translating Tech for Fin. There is so much innovation around Blockchain that it is hard for business executives to keep up to date. Our job is to find the stuff that matters and bring it to your attention.

We think Colored Coins is an important development in the Blockchain world. We will parse the tag line on their front page to explain why: 

The Open Source Protocol for Creating Digital Assets On The Bitcoin Blockchain

  • Open Source Protocol. This is like TCP/IP or HTML. No company controls it or makes money directly from Colored Coins. You make money by adding value on top.
  • Creating Digital Assets. You don’t buy an Alt Coin. Let me repeat that. You don’t buy an Alt Coin. You “color” an existing Bitcoin ( % of a Bitcoin or number of Satoshi, which is the smallest divisible unit of a Bitcoin) to represent an asset (stock in a company, a house or car or painting or whatever). Then you can buy and sell those assets frictionlessly across borders. 
  • Bitcoin Blockchain. This is about the public Blockchain. You can also use Colored Coins on Ethereum (another popular public Blockchain). If you believe that all Blockchains will be private, this is not for you. Using the analogy with the development of the Internet, this is about the Internet not a collection of Intranets. Open Coin transactions are validated by a consensus network (either Proof Of Work by Bitcoin Miners or Proof Of Stake or whatever Ethereum uses). 

Of course, an open source protocol is only as good as the use cases created by entrepreneurs. That is the subject of a future research note.

Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech & operates the Fintech Genome P2P Knowledge platform.

9 thoughts on “IPO or ICO or IEO (briefing on Colored Coins)

  1. Bernard, you should really unfriend whoever recommended cryptmarketcap.com. That site says it was updated in March but those look like 2013 numbers to me. coinmarketcap.com is the standard reference for this and it’s updated automatically several times per hour. I think the numbers there will be eye-opening for you. Why is another altcoin the last thing we need? There are plenty of crap altcoins (just like there are plenty of crap companies selling equity) but there are also many stellar projects that have issued an altcoins.

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    • Thanks for the heads up. I have changed the link. I think that some of the companies that raised money using Altcoins are great companies – Ethereum for example – but I am not sure that an Altcoin is the right funding tool. That chart shows all of them struggling for investor attention compared to Bitcoin (seen by the market cap).

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      • At what point is an altcoin no longer struggling for investor attention? Ethereum has a $1 billion market cap for example. Ripple is worth $300 million.

        Also an altcoin is not necessarily a funding tool. Most altcoins are issued to miners over time as they secure the network which is exactly how bitcoin was and is distributed.

        There are other distribution examples such as the Counterparty project which issued the entirety of its XCP altcoin to bitcoin holders who “burned” some of their bitcoin (meaning sent them to an unspendable address) in exchange for the XCP. The Counterparty project never saw a dime.

        Liked by 1 person

  2. One can certainly make money by being early in an Altcoin that gets traction eg Ethereum or now ZCash. So yes they are becoming tradeable commodities like Magic The Gathering cards. But note that a) they usually quote in Bitcoin and b) 99.99% of the population are still figuring out why they should use Bitcoin. Ripple seems to be moving away from Altcoins as they raise conventional VC to compete with SWIFT.
    I plan to do a deeper dive into Counterparty.

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    • Altcoins have been tradeable commodities since their inception. That’s their most native function.

      a) There are altcoin markets in USD, EUR, CNY and almost every other national currency. coinmarketcap.com quotes every altcoin in 9 different fiat currencies.

      b) Bitcoin has an $11.25 billion market cap. If only 0.01% of the population has figured it out as you say, you’ve potentially made an extremely bullish prediction.

      Ripple moving away from its XRP altcoin? Nothing could be further from the truth:

      http://www.coindesk.com/global-banks-test-ripples-digital-currency-new-blockchain-trial/

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  3. Dear Bernard,

    I stopped reading your post when I checked the link to the market cap of the top alt coins. This site is so outdated it hurts. Please replace the link with this one http://coinmarketcap.com/currencies/ . Bitcoin is at 11 billion now and Ethereum (not listed on your linked website at all) is at around 1 billion.

    Now that I have sent you this, I will continue reading.

    Best regards Bernd >

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    • Thanks Bernd, somebody else also pointed it out and its corrected. At least with digital media, mistakes don’t last long! Best Regards. Bernard

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  4. “99.99% of the population are still figuring out why they should use Bitcoin.” I totally agree with you on that part and therefore the future for Bitcoin, Ether and a few other AltCoins is very, very bright. We just need to get real world applications and I think that Switzerland with the Canton of Zug allowing Bitcoin payment for canton fees and now SBB offering to buy bitcoin at their ticketing machines, are paving the way for more possibilities.
    I think the biggest part you are missing is the different approach for the “new kids on the Block”. Startups can receive funding by creating their own coin (Coloured Coins) and through an ICO get much more and quicker funding than through an IPO. Maybe you want to dive into the time and cost difference between IPO and ICO and you will see that ICO is the future, for investors as well as startups.

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