Even in all the hype surrounding cryptocurrency investing, few things have been hyped as much as the upcoming initial coin offering (ICO) by Telegram. Unfortunately, investors and traders would be wise to steer clear of Telegram's ICO. Telegram's ICO is ultimately a publicity stunt and cash grab designed to take advantage of crypto's hype. It gives the crypto space a bad name and is contrary to crypto's founding principles.
Telegram is a cloud-based instant messaging startup founded in 2013 by Russian entrepreneurs Nikolai and Pavel Durov. It markets itself as a nonprofit corporation that has over 180 million monthly active users on its app. The client side of its code is open source, but the server side is closed source and proprietary. Telegram claims that its app is cryptographically secure and touts its use by journalists and dissidents under authoritarian regimes, but independent experts have criticized that argument. Regardless, the Telegram messaging app remains immensely popular.
Although billion-dollar tech unicorns have made the news in recent years, they are rare and take time and effort. But Telegram wants to be on a fast track. Its upcoming ICO is looking to raise over $2.5 billion in only four months, a record-breaking and unbelievable valuation. According to official documents filed by the company, it has already raised $850 million from international venture capitalists and accredited investors in a presale, is raising another $850 million in the next month, and will raise a last $850 million afterward, possibly from retail investors. Some prominent Silicon Valley firms have participated in the first round, including Benchmark, Sequoia, and Kleiner Perkins.
No doubt, Telegram's project is at once ambitious and nebulous. Its 132-page white paper promises to use funds raised to create a virtual currency blockchain for common people and a global computing network to rival Ethereum (ETH), named the Telegram Open Network (TON). Specific services promised include distributed file storage, decentralized proxy web browsing, smart contracts, and peer-to-peer payments. So it seems Telegram's public message to its investors, regulators, and potential buyers is that its ICO project will be revolutionary and industry-changing, worthy of the immense price tag.
But red flags are everywhere. First, it's laughable that Telegram is a multi-billion-dollar company, but its ICO does not even have a website yet. Second, the enormous price tag is suspicious. Usually in finance, privately-owned companies exchange equity, or shares in the company, for capital in a fundraising round. Telegram is looking to rake in $2.5 billion without giving up any equity, meaning participating investors will have no way to influence Telegram's decisions after fundraising closes. Third, the ICO is billed as an unprecedented investment opportunity, and speculation is fueling the hype among venture capitalists and accredited investors. Finally, Telegram itself admits there are numerous risks associated with investing in its ICO, including legal and regulatory, development, and adoption risks, etc.
What will probably happen as the ICO concludes is a financial nightmare. Accredited and institutional investors who bought TON at deep discounts in the first round will likely dump their holdings in the market for quick profits, leaving investors from the last round to hold the bag on big losses. In general, crypto enthusiasts and believers should stay away from Telegram's ICO. It goes against Satoshi Nakamoto's principles of decentralization and openness, instead handing control to a large corporation and big financial institutions, with the prospect of hurting retail, mom-and-pop investors.
The author does not hold any positions in any of the securities above.
