Recall the last time you touched a nontrivial amount of money--booked a hotel, took a flight, went on vacation, that sort of thing. Did you hand over currency? No. You did it digitally. You transferred value from your account in your name, into someone else's account in their name. They got money, you got something you wanted.
Boom. This basic behavior is fueling the rise of tokens. As in, $3 billion so far this year.
Quietly disrupting how companies finance themselves and their chances of succeeding, issuing a digital value in dominations called tokens is becoming a global business. Some say it's a fad, others are sure it's a fraud, but for many startups, it's more like manna from heaven. How much manna? Well, CoinSchedule tracks moneys raised through Initial Coin Offerings - often called token sales. (You insiders, let's skip the grammar debates for this article because there is no hard lexicon yet on what to call things.)
It reports over $3 billion in token sales across 200+ raises so far this year.
How token sales work
The way token sales work, you "tokenize" or digitalize a piece of your business that customers want. You need some digital derring do to do that--a choice blockchain, maybe an algorithm -- but the backend on how to tokenize is not rocket science for most businesses. People who are intended to buy tokens are those who either need the service, or want to speculate on the rising value of such a service.
Imagine a lawn mowing company that could offer an "acre-of-lawns-mowed" token. If they offered these tokens at $50 each, lots of people who want their lawns mowed would buy them. What makes tokens unique from becoming a customer or an investor, though, is the token holder has more options than just getting a lawn mowed at a future date.
Tokens have these characteristics:
· They represents something in your business, usually a service customers buy
· Their ownership is recorded on the blockchain
· They do something--it's not just money; it's magic money that represents an activity like a piece of code that executes when the token is turned in to the company
There are two ways for token owners to be rewarded
1) Offering the token back to the company - ie, get your acre of lawn mowed, or other business service executed like file transferred, bitcoin mined, protocol run, etc.
2) Waiting for the price of the token to rise on the token exchange so you can sell your tokens at a higher value than what you paid for it--which is of course, speculation. (Or, investing, as the many angel investors, VCs and others say about their decisions to carry a token balance these days.)
Bitcoin mining companies sell tokens for mining time. Gaming companies sell tokens that represent value in the game.
Why token sales are a big deal
Tokens give investors at least the illusion of something that they have never had before: liquidity. Previous to this model, when you invested in a startup's business, you were often someone who could be a customer, a "strategic," or another type of angel that really "drank the Kool Aid." When you invested, you had a convertible note or a sales contract--and hope. Now, thanks to tokens, you have a blockchain recorded private asset, the value of which is on a public, decentralized market.
That could still be bad, of course, if the startup doesn't deliver. But then again, if were going to die, you'd have to eat that anyway--the risk of failure is no larger with a token vs. any other vehicle of startup success speculation. The nice thing is, you can choose to sell your stake in the startup success on a coin exchange instead of having to stay invested until a liquidity event. On the coin exchanges, liquidity is temptingly accessible. That's new. You could almost think that early stage investors, angels and the like are a bit giddy about it.
Token sales aren't simple--yet.
Because selling tokens is relatively new, there's a host of unknowns about them, like:
Regulation. How will selling tokens be regulated in the future? A lot of lawyers I speak with say publicly they do token sales, but privately, they say they think it's a fad if not an outright fraud. Along those lines, John Biggs, Tech Crunch editor, puts it well: "The legality of these sales around the world is still up in the air, and there is a fine line between tokens and penny stocks, a fact few want to admit,"
Markets. While a lot of people talk about how tokens thrive on exchanges, there's no stock exchange of small business value just yet. That could evolve--maybe--but it's a long way in the future as a realistic market.
Nicolai Oster, head of Bitcoin Suisse AG, as reported by Ben Arnon, recently said, "I expect crypto prices will surge as demand rises and investors need Ether to invest. In November I expect we'll see a correction. In January, I predict prices will come back." This kind of volatility just screams insider knowledge or emotion is leading, not fundamental value analysis.
Corrections. Are there going to be penalties for small businesses that sell tokens based on a business plan, but then don't execute the plan, or come even close? Likely. People who back a company that made promises in good faith will at some point seek their day in court, and that could be a regulation-provoking event.
Bottom line on token sales
Raising distributed capital from close connections that have a reason to see your business succeed is clearly a winning idea, and that's why the token craze is so cool. Having a marketplace where those early champions can see a little liquidity instead of locking up capital for 10 or 20 years--also a game changer. For these basic reasons, token sales are here to stay.
There's nothing like tapping the market of interest in the product you want to build--which is what the best of token sales do. The worst use hype and slight of hand to make it look like they're doing that. That's definitely going to lead to a lot of money lost before protective regulations are enacted on this surprise multi-billion dollar industry.
The question is not whether token sales are fad or fraud
It's how you as an entrepreneur are going to use them as they become an increasingly critical part of the startup funding or investing toolkit.