Abstract
The main theme of the book is to provide a complete picture of all aspects of blockchain financing phenomenon, that started in 2013 and by the end of 2018 have reached the total volume in excess of $20 billion. Using the manually-constructed database on all known token sales that took place from 2013 to September 2017 we study how the phenomenon evolved outside of the conventional financial system, providing detailed statistics on all aspects of blockchain financing and its evolution. We argue that blockchain financing is the new advanced stage of equity and reward-based crowdfunding and provide a comparative study of token sales vs. crowdfunding and conventional financing methods such as primary or secondary public offerings or VC.6 In the first chapter we survey the state of the financial industry following the global financial crisis that started in 2008, and on the example of Italy argue for new ways to obtain financing bypassing the conventional bank’ loans channel that still suffers from the wounds inflicted. Next, we address briefly the modern advances in supporting and financing of the start-ups, such as regional or local technological parks, hubs, and incubators; microfinancing and business angels as new venture capitalists. Then we analyse the new capital issues’ channels for SME such as mini-bonds market and new equity exchange market AIM that allows smaller companies to sell their shares to outside investors. In the following section we focus on the recent phenomenon of crowdfunding that allows EVs and SMEs to tap international private capital markets. The second chapter overviews the blockchain innovation and analyses its evolution and mutation from niche market into multibillion-dollar industry that attracted attention of investors, entrepreneurs and regulators worldwide. We outline the main features of blockchain financing and compare it to more conventional methods of capital raising. Given that the phenomenon has developed completely outside of the financial industry and free from regulatory oversight, we study the ways the blockchain financing was used and which innovations were decisive in bringing it to the current state as at the end of 2018. In the third chapter we provide a review of the literature on token sales. First, we analyse the major reports of the international think-tanks that attempted to provide general overviews of the growing Initial Coin Offering (ICO4) industry, of its main trends and regulatory responses. We also survey the scant academic literature published so far on the topic. Chapter four overviews the construction of our proprietary multi-dimensional dataset of all ICOs that took place from 2013 4. We use “token sales” and ICOs interchangeably throughout the book, as they mean the same thing. 7 and analyses a host of measures of ICO success. We provide statistical evidence that successful ICOs tend to be more self-compliant with the forthcoming regulation and spend more effort on signalling their quality and reducing the asymmetric information problem. We also illustrate the fallacy of focusing on one single measure of ICO success as is often done in many empirical studies on the topic. We show that various measures of success are only weakly correlated between each other and, worryingly, are not correlated with the post-ICO long-run token performance, which depends more on the Ether cryptocurrency return, on which blockchain the majority of the tokens are being issued nowadays. The fifth chapter takes a closer look at the mechanics of token sales and main players in the emerging ecosystem of blockchain financing. We systemize the market mechanisms and funding methods by which the tokens were offered to the public, methods of payments, tokens allocation practices, marketing channels used to communicate and attract attention of the investors, and techniques of token price determination. We show here how the established practices were developed from scratch, without any involvement of investment banks and established financial intermediaries. Being completely unconstrained and free from supervision and regulation of national financial markets regulators, the industry has witnessed an unprecedented volume of fraudulent activities and unequal treatment of ICO investors groups by many token sellers. We provide an account of these activities as it happened in the period from 2013 to 2017. We also provide a short overview of the new class of financial and information intermediaries that evolved to address some deficiencies of the blockchain financing and study the level of involvement of venture capital and angel investors in the process. The sixth chapter addresses a very important question of who is investing in token sales. Given the pseudo anonymity of the transactions on blockchain (in general, it is not possible to identify the 8 parties transacting on blockchain), little is known on the identity and characteristics of these investors who finance the start-ups by buying their tokens. By analysing blockchain data, we are able to identify large and recurrent investors in the ICOs and test several hypotheses regarding the timing of their contribution and whether with recurrent participation the investors succeed in investing in better-quality ICOs. In the seventh chapter we study the cryptocurrency markets, online crypto-exchanges as the vital part of the new ecosystem and take a closer look at the tokens that are issued by the fundraisers in exchange for invested funds. We attempt to provide a holistic view on the tokens’ universe that, starting from bitcoin, now contains more than two thousand cryptocurrencies traded and exchanged around the world twenty-four hours a day. We look at various token classifications, creation methods and their liquidity, and analyse the risks to which the token investors are exposed both from theoretical perspective and as sourced from a sample of token purchase agreements issued by the fundraising entities. We conclude by surveying the current state of the blockchain industry, token sales financing and outline the future trends and problems to be solved before blockchain financing will become a valid and widespread method of raising capital in the near future.