The Future of Initial Coin Offerings:
Will the ICO Market Correct Itself Before it’s too late? (2 of 2)
The crypto world has witnessed a roller coaster like rise and decline of initial coin offerings (ICOs). According to ICOdata, since the year 2014 there have been over 2,000 Initial Coin Offerings which have raised over $15B dollars in financing for their respective companies. The amount of ICOs were at their peak between the second half of 2017 and the first half of 2018. Companies continue to use initial coin offerings as a fundraising mechanism but reports indicate that recently, ICOs have not been at the same pace and success that we have seen since that time period.
There are three main reasons why the ICO raises have been in such a significant decline since the second quarter of 2018, and in order for the ICO market to come back strong, the coin offering landscape is going to need to undergo a makeover.
THE MAIN REASONS THE ICO MARKET HAS DECLINED
Reason #1- The Cryptocurrency market went bear:
Illustrated by CoinMarketCap, the price of Bitcoin (BTC) fell tremendously after reaching its all time high of $20,089.00 on December 17, 2017. For the past month the price of Bitcoin has steadily been within the $5,000.00 to $5,600.00 range. Since December of 2017, the average price of altcoins (Non Bitcoin cryptocurrencies) have also fallen. When the price of Bitcoin was soaring, investor appetite was large and people were buying in at incredible rates. In addition to the large appetite for Bitcoin, an enormous interest grew in the altcoin market, where many investors were hoping to discover the ‘next Bitcoin’.
You previously read about How ICOs work and why companies have initial coin offerings; well two primary reasons investors are motivated to invest in ICOS are:
1- They find utility in the company, its platform and the token’s use within that platform. They want to invest early and become a contributor to its community and take advantage of the benefits of being a token holder.
2- They believe in the token’s upside in price value and want to get in early so they can make ‘a fortune’ in the secondary market by trading the token on a cryptocurrency exchange.
That second investor motivation is a problem. For those investors whose primary reason for investing in initial coin offerings were to get in early for a potential large secondary market return, when prices indicated little to no returns within that secondary market, the investor motivation dwindled. And as a result, a significant segment of the ICO investing disappeared.
Reason #2- Too many companies failed post ICO.
In addition to the drop in values of the major cryptocurrencies, a lot of companies were simply failing to succeed after their raise. According to Bitcoinst by the first half of 2018, 92% of blockchain projects have failed. The barrier of entry for a company to raise money through an ICO was initially very low. This gave companies that may not have been the most prepared to launch and run a blockchain based company the ability to start one without a proper business plan in place. Many ICOs although well intended, were based on little more than whitepapers, pitch decks, nice looking websites and charismatic founders telling investors their story. Missing in many cases, was a strong infrastructure, proof of concept, technological capabilities and go to market strategy. In many cases the polished pitch deck, well written whitepaper and charismatic founder would be enough to raise a lot of money. In most of the cases however, it wasn’t enough to make a company successful. And ultimately after some time, every startup company has to deliver for its investors.
Then of course we have the bad actors, fraudsters and scammers. These were the individuals and companies that saw the buzzwords “blockchain” and “crypto” trending, capitalized on the excitement and lack of regulation, raised a lot of money for themselves and never followed through on the promised project.
Whether they be frauds or well intended fails, neither has been good for the ICO market because they both shake investor confidence. Investor confidence is everything specifically in a market fraught with volatility. Even within a very old and stable industry, the failure rate is high for a startup company to succeed. Blockchain companies are operating within a very nascent and unproven industry which makes it even more difficult. And that especially makes it tough to win back lost investor confidence.
Reason #3- An increase in regulation of initial coin offerings.
Cryptocurrencies did not face much regulation early on but the Securities and Exchange Commission (SEC) quickly brought the ICO market into its line of sight once billions of dollars began flowing into the market. After significant scrutiny, the SEC determined that the ICOs they have seen were securities offerings subject to securities laws and SEC oversight. A series of enforcement actions by the SEC against companies during their ICOs and based on this premise brought an added chill to the ICO market. In this instance however, instead of investors walking away, it was the companies choosing to walk away rather than stand eye to eye with the SEC and the challenges of running a SEC compliant initial coin offering.
The cryptocurrency’s bear market, the large amount of failed companies and the increased regulation have all contributed to the decline in initial coin offerings. The silver lining is that these very same things may also save the ICOs in the future. The ICO market became too volatile, too fraudulent, too unregulated and ultimately too risky for many investors. The relatively stable cryptocurrency prices we have seen this year are encouraging signs of declining volatility. Additionally an increase in SEC regulation should remove a lot of the bad actors from the market. This will also provide investor protections.
Most importantly, time has elapsed for industry professionals to reflect on the market to see what works and what doesn’t. Companies can review what it takes to make a successful initial coin offering and how to thereafter create a sustainable blockchain based business. Entrepreneurs and companies will see that they need to show more than a well written whitepaper and pitch deck. They will need to properly demonstrate a real world problem, a viable blockchain based solution to that problem, and their ability to implement that blockchain based solution while developing a native coin that has actual utility within their platform. Meanwhile, investors will understand that they will need to perform better diligence before they invest in an initial coin offering.
All of these steps can create a stronger, and more effective market for initial coin offerings. The landscape will be different in that the volume may decrease or the raises may not be as high. We may even see that the majority of the offerings change into pure equity offerings instead of direct sales, the offerings may become primarily listed through verified exchanges in the form of Initial Exchange Offerings (IEO). There may be several other changes not contemplated herein. This all remains to be seen. Token sales and coin offerings done right can be very good for blockchain based companies and the entire blockchain and crypto industry. The failures and struggles the market has seen may have been the best thing for the industry. Because now it has the chance to adapt and adjust. That would be a great thing. However, if there is no true change, the ICO market may never recover and reach its true and full potential. And that would be a terrible thing.