Following the impressive bull run of Initial Coin Offerings (ICO) of 2017, many financial analysts and crypto enthusiasts started to compare the ICO industry with one big cash-grab scheme.
Sure, many of them of will fail - just like any other business - but most of the ICO detractors are missing a crucial point: without primary markets, there would be no new cryptocurrencies.
Primary versus Secondary markets
Primary markets are the place where cryptocurrencies are issued for the first time and sold by the issuer. Token holders that sell and purchase digital assets between themselves, at a price decided by market supply and demand dynamics, do it on secondary markets.
In short, primary market assets are sold by the ones who created it them in the first place, while secondary market ones are traded between token holders, generally on an online crypto-exchange.
Multiple issuance models
The issuance of stocks, bonds and other mainstream financial instruments happen under a tight regulatory environment and a meticulous legal process.
Cryptocurrency primary markets, on the other hand, is an unknown territory with innovation spurning out of nowhere.
It started with mining
Bitcoin started off its operations with Proof-Of-Work mining. Miners invest their time, energy and hardware to mint new coins and get a Bitcoin for reward. Mining has been the first way of purchasing cryptocurrencies in primary markets.
Bitcoin mining is a transparent process: capitalistic miners compete to win a prize by allocating their resources to the task. But that does not mean every cryptocurrency using PoW mining to secure its network holds the same features.
For instance, we can suppose that not every ZCash miner knows that 25% of the miners' rewards are taxed by the ZCash Foundation, although it is hard coded on the blockchain.
Organisations selling tokens
Last year, the ICO industry raised heaps of cash for so-called utility tokens leveraged in decentralised applications that, in reality, did not exist at the time of the sale.
Nonetheless, today, the ICO model has become the primary means of asset issuance in the crypto primary market. Other models such as the interactive sale offering, the capital building mechanism or the continuous organisation offer tangible alternatives to the ICO model, but are yet to be democratised in the space and comprehended by investors.
Overall, cryptocurrency primary markets regroup today two models of asset issuance: mining and organisation-led token sales.
A challenge for investors
While the process of mining is somewhat fair and transparent, token sales, on the other hand, introduce major asymmetry of information between issuers and buyers.
The absence of regulatory and disclosure frameworks create an unfair advantage for issuers that often exploit retail investors seeking quick gains. The opacity around the utility, supply and capitalisation of token economies creates challenges for investors that, for now, need to undertake a thorough due diligence before entering any investment.
Today, primary market investors can rely on listing websites (like tropyc) until new generation token sale smart contracts - that create a fair issuer-to-investor relationship - are fully democratised.
Decentralised solutions, especially Token Curated Registries (TCR), can also solve this pressing issue. It facilitates a transparent list of tokens selected dynamically by the TCRs' curators, that can implement a set of condition and criteria to include or exclude a token from the registry.
FYI: For all the ICO and crypto primary market detractors out there, there is no secondary market without a primary one.