Author | Zhao Changpeng
Translation | Wu Shuo Blockchain
This article is for information sharing only and does not endorse or promote any business or investment activities. Readers are strictly advised to comply with local laws and regulations and not engage in any illegal financial activities.
On July 24, Zhao Changpeng tweeted that a project he mentioned in an article six years ago, which planned to raise $100 million in an ICO, is currently worth less than $1 million. He believes that the team is a group of good people, but they may have been distracted by too much money. This article is the one Zhao Changpeng wrote at that time, explaining why he dislikes large-scale ICOs.
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Original article link:
https://steemit.com/binance/@czbinance/5mm9uo-i-don-t-like-big-icos
I am CZ, the CEO of Binance. This is my first post on Steemit, and it is a very subjective post.
Last night, I attended a party organized by several cryptocurrency enthusiasts in Tokyo. The organizers wanted to hold an ICO. Although the team was small, they were very capable. They had already built and released a product. It had a considerable user base. Everything sounded good until I asked how much money they planned to raise in their ICO. The answer was $100 million. My face immediately changed, saying “I don’t like this.” A discussion followed, and I thought it would be beneficial to share with everyone who wants to conduct an ICO or list on Binance.
A large-scale ICO is good in many ways, at least theoretically. It can make headlines, increase awareness and reputation of your project, impress people with your capabilities, and boost team morale. $100 million should meet the long-term financial needs of the project! With sufficient funds, the project team can boldly do what they want and vigorously develop into a great empire. All these wonderful things can be achieved sustainably…
But I don’t like it, and here are the reasons.
First, does your project really need $100 million?
The first answer I got yesterday from a team member was, “Yes, we will build the entire ecosystem, acquire companies…” I interrupted him there. I prefer to see startup teams have a high degree of focus on one task. This is just my personal preference. My personal preference does indeed influence Binance.
Do you need all the funds right now?
One misconception is that an ICO is a one-time event. You must have all the money you need now! This is incorrect. There are many ways to build a token economy that allows your project to obtain all the necessary funds in the future without subjecting all investors to huge risks from the beginning. I will discuss this in detail later.
Hunger
I’m concerned that a small team with $100 million may no longer have hunger. Of course, the most motivated team should be intrinsically driven, wanting to change the world, and so on. Some people can still maintain hunger even when they are wealthy, but not everyone can. I still hope to see a hunger within the team. I like to occasionally see code submissions on GitHub at 3am.
Aside from these, the key issue is token economics.
Maximizing value during ICO = bad
I don’t like to see projects reach their maximum value during the ICO. This is usually detrimental to the long-term development of the project. This contradicts the intuitive thinking of many ICO initiators in the room yesterday.
A token that maximizes its value during the ICO will only see its price fall once it is listed on an exchange. This raises many issues that most people did not consider during the ICO stage. But as an exchange operator, I often see this situation, fortunately mainly happening on other exchanges.
Assuming your project is worth $200 million today, and you sold 50% at a price of $100 million during the ICO. One day later, your token can be traded on Binance. Leaving aside speculation and market overreactions, unless you have increased the value of the project within a day, the price on the exchange will not rise further. When the price does not rise, it falls. Some people (short-term traders) will convert it into tokens that rise in price faster. This selling-off leads to a price drop, and when the price drops, more people (lacking confidence) will follow suit, causing a downward spiral in price.
Now people are losing money on your token. Some people will complain, slander you, call you a scammer, and post their conspiracy theories on more social channels that you cannot monitor. Now your reputation is damaged, and you are putting all your energy into managing bad PR instead of coding. Due to bad news coverage, your user growth rate is declining. Your hiring also becomes difficult. People in the office start arguing about what went wrong and start blaming each other. Everything is going downhill…
And now you are immediately faced with the heavy burden of raising your project’s valuation from $200 million to $400 million, which is not an easy task for most new projects.
Another option
Now let’s compare another scenario. Suppose your project is worth $200 million today (or any amount you think), but you set your valuation at $30 million and sell 50% to raise $15 million. (These are the actual numbers when Binance sold its own tokens. I think these are very decent numbers no matter how you measure them, because we promise to deliver what we commit.)
But you might say, “Damn, that’s stupid. I’m short $85 million in fundraising and there’s even more valuation.” If you think that way, then keep reading.
Of course, now everyone is trying to participate because of the low valuation. It is completely oversubscribed. Everyone is asking you for more quotas and you say, “Sorry buddy, you’ll have to buy on the exchange later.” Your purchase ends in 38 seconds (a real record from Binance). A day later, your coins start trading. People rush in. No one wants to sell. Prices soar. More traders are attracted to your coin than other coins. Now you are the talk of the town. Everyone is discussing your project. People make YouTube videos analyzing how great your coin is. With all this free positive publicity, users register for your service faster than you can imagine. (This is another real case from Binance.) In about a month, you enter the top ten in the world. With the growth of users, your project is now valued at $300 million, and your 49% stake is worth $150 million.
Now most of your investors have made money, a lot of money, a 10-fold return in two months. You have a user base, a product, and positive community support, and you are expected to grow at a faster pace. You can slowly sell your stake at a valuation of $300 million or higher. The whole point is to make money with your investors and create motivation!
From the exchange’s perspective, there is a simple math to consider. If the circulating supply of your coin is $30 million, with 80% held by long-term holders. You only need to attract buyers worth $12 million to double your valuation. If your circulating supply is $300 million, you need to attract $120 million. If you look at the trading volume of the top 10 exchanges today, you will find that while it is relatively easy to squeeze out $12 million from other coins, it takes some effort to squeeze out $120 million. So, if you can demonstrate that your coin can bring in new users with $120 million in funds to our exchange, we would be more than willing to list it. Otherwise, we may need to carefully consider whether to list your $300 million coin, especially if your coin is new and has no trading history.
After explaining all this in detail last night, there was a feeling in the room that “Oh, now that makes sense, I never thought of it that way before.” I think I successfully shifted the mindset of most people in the room from “one-time big money” to “long-term growth”. I hope I can do the same for you. This will make it easier for us to list your coin.
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