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Why Cryptocurrency Firms Are Launching Tokens Even When They Shouldn’t – DL News
- Many new cryptocurrency companies have an incentive to raise capital by issuing tokens.
- This is because cryptocurrency investment firms have a relatively limited investment time horizon and are looking to make quick gains in the form of token launches.
- But this creates misaligned incentives between companies and their investors.
Crypto startups are increasingly forced to launch tokens. And that’s unfortunate for the industry.
That’s according to Elliot Chun, a partner at Architect Partners, a firm that advises cryptocurrency companies on funding strategies.
“I hate it,” Chun said. DL News“It’s bad for companies, because most of them shouldn’t even have a token in the first place.
“They need to come up with some sort of bastardized token structure that makes sense legally, but puts the founders at risk,” he added.
No Exit
The problem, Chun said, is that it is becoming increasingly difficult for cryptocurrency companies to raise capital if they do not provide their investors with a way to cash out relatively quickly.
Aside from Bitcoin mining companies, only one major cryptocurrency company, Coinbase, has gone public so far.
While stablecoin issuer Circle has already filed for an initial public offering and cryptocurrency exchange Kraken is considering the same, the Securities and Exchange Commission’s aversion to cryptocurrencies made it difficult so that companies can realise their ambitions.
This means that most people who invested in cryptocurrency companies without tokens have not yet been able to cash out.
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“In general, if you invested in BitGo, Anchorage, Fireblocks, or any other custodian, there was no return of capital to the investors,” Chun said.
Investment horizons
Waiting a decade for a payout isn’t a problem for investors with a background in traditional finance, who are used to having long-term horizons, said Robert Le, a senior analyst at Pitchbook, a private market data provider. DL News.
But traditional venture funds are still reeling from the 2022 bear market and the collapse of cryptocurrency exchange FTX, Le said, and have yet to step back into the cryptocurrency market.
This means that the cryptocurrency industry is raising capital primarily for crypto-native funds, and these companies tend to make investments with the expectation of a quicker payback.
Because they can’t exit via an IPO, cryptocurrency venture funds naturally pay more attention to teams promising to launch a token.
“It’s difficult for [crypto] “It invites investors to come in, because they don’t want to be stuck for seven or 10 years,” Chun said.
“Investors are driven by one thing, and that’s return on investment,” he added. “That’s their job.”
Coinbase Ventures, Andreessen Horowitz, and Galaxy Digital, three major cryptocurrency venture capital firms, did not immediately respond to requests for comment.
Risks in issuing a token
The problem is that tokens often have no real reason to exist. And they often become net negatives for the companies that issue them.
“It brings a lot of speculation,” Le said. If the token price goes up, “it’s really exciting for the founders and employees, but then it drops 90% and the founders lose interest and leave early.”
“It creates a really negative dynamic,” Le added.
Chun said that the launched tokens could also expose the founders to lawsuits and criminal investigations.
Sooner or later, “regulators will reexamine how some of these token airdrops happened,” he said. She said“He’s about to knock on the door.”
Tom Carreras is a market correspondent for DL News. Have a tip on cryptocurrency companies and venture capitalists? Contact us at tcarreras@dlnews.com