Despite advertisements being banned on the most popular media platforms, regulatory scrutiny and a lot of bad press besides, money has been pouring into the ICO market since the start of the year. Blockchain startups raised $3 billion through ICOs in the first two months of the year, half the value of all funds raised throughout 2017, according to Coindesk data.
At the same time venture capital, or the “smart money”, has also been taking a punt on blockchain companies. Since December, $434 million was raised through venture capital funds, the most ever in a three-month period, according to CoinDesk.
Yesterday Morgan Creek Capital, the $1 billion hedge fund run by outspoken blockchain bull Mark Yusko, announced it has acquired Full Tilt Capital, a venture capital company that has recently dedicated to investing entirely in blockchain. Yusko has been on record saying that Bitcoin will reach the $1 million mark in coming decades.
They are currently fundraising for a $500 million blockchain fund which it expects will attract interest not just from high-net worth individuals but also endowments and pension funds.
If Morgan Creek raises the $500m for the fund it will comprise 25 percent of the firm’s assets and it will become the largest crypto hedge fund.
Yusko has said that his firm believes “blockchain to be one of the most powerful and valuable technologies to have been developed in the digital age and also believes that the disruptive power of the application of blockchain technology across all asset classes will create enormous investment opportunities.”
Full Tilt Capital’s background is in real estate investing and managing partner Anthony Pompliano said the firm would focus in the future solely on blockchain-based transactions through security tokens. He told Bloomberg that the new fund will attempt to tokenize real estate, equity and debt and that it was currently assessing the opportunity to tokenize the equity in a New York hotel.
Due to the relatively high failure rate of ICOs, investors may view buying security tokens - tokens linked to equity or assets — as a way of mitigating some risk with a claim of stake. In 2017, 46 percent of token startups either failed after their ICO or weren’t able to complete funding, according to data from Bitcoin.com.
In February, Security Exchange Commission (SEC) chairman Jay Clayton said that “every ICO I’ve seen is a security,” this despite most companies insisting that their tokens are not and that they shouldn’t be held to the same regulatory framework.
But with shareholder rights and recourse well defined for securities perhaps owning security tokens will provide a safety net in future should the ICO go up in smoke or the business act irresponsibly.
Part of the attraction for venture funds in blockchain companies is that if the company does go to an ICO, and they hold the coins, they can sell their stake in the company sooner than they could sell an equity stake.
Security tokens (that offer equity) can be more easily traded than traditional equity in a start-up company which can be tied up for years contractually or until an IPO is reached. The lockdown period for selling tokens is usually around one year and the ease of transacting them online also makes them attractive to investors who can buy them directly instead of through funds or brokers.