If you’ve been following the cryptocurrency or FinTech fields, chances are that you’ve heard of the term Initial Coin Offering (ICO). This is a relatively new way for startups to raise money by issuing and selling their very own cryptocurrencies.
Individual projects would have their fundraising rounds completely finalized in a matter of weeks, if not days, getting retail and institutional investors to line up to participate.
Fast-forward a couple of years, however, and we can see that most of the projects which raised money through an ICO failed to deliver on their promises, causing their investors massive losses.
Nevertheless, the history of ICOs, regardless of how brief it may be, is definitely an interesting one, especially for those with interests in investments. The following graphic represents their growth and their evident decline.
In any case, let’s have a look at how ICOs caused a massive disruption in traditional VC fundraising models and why they eventually failed.
It all started back in 2016
Technically, ICOs started back in 2015 as some very large projects such as Ethereum, IOTA, and Augur had their coin offerings held in 2015. However, this new fundraising method for blockchain-based startups and businesses really took off in 2016 when their number started to grow notably.
Not only the number of ICOs skyrocketed but also the number of investor dollars. Data from popular resource ICOData reveals that 29 projects managed to raise as much as USD$90 million back in 2016. While this may seem as an inconsiderable amount in the traditional world of investments, it has to be considered that this was a model introduced just a few months ago.
What is more interesting, however, is the speed with which these projects raised money. FirstBlood raised USD$5.5 million and SingularDTV raised USD$7.5 million – both of them doing so in less than 15 minutes. While not every project saw its capital funded as quickly, most of them were particularly fast, especially compared to traditional equity-based funding.
Transitioning Into 2017
This is where things started to get really interesting. As opposed to 2016, when the model was going through its very early stages, 2017 saw an influx of capital poured into blockchain-based startups through initial coin offerings.
The year saw more than $6 billion invested into roughly around 875 different projects. Naturally, everything peaked in December.
December was the parabolic month for cryptocurrencies and businesses around them. Bitcoin surged to an all-time high of around USD$20,000 and the entire market cap of all digital coins peaked above USD$800 billion. The world was taken by a storm.
Everyone was talking about Bitcoin and data from Google supports it.
The interest in the world’s leading cryptocurrency transitioned to the entire market, as seen on the above charts displaying the capital raised through ICOs.
This is also when we start seeing massive returns from those projects. The cryptocurrencies they issued through an ICO would eventually get listed on an exchange and their prices would skyrocket, netting initial investors tremendous gains.
Let’s take Binance Coin (BNB), for example. That’s the native coin of the world’s leading cryptocurrency exchange, Binance. Their ICO took place between July 1st and July 21st, raising a total of USD$15 million. Investors could buy BNB tokens for USD$0.10.
Less than a month later, its price was already around USD$2.8, marking an increase of around 2,700 per cent. In December, during the surge, its price was around USD$8, which gave investors a return upwards of 8,000 per cent in less than half a year’s time. It’s perhaps very easy to see why people were eager to invest in ICOs back at the time.
Going downhill: The bear market of 2018
Once Bitcoin hit USD$20,000 and it pulled the entire market with it, retail investors poured the market with interest surging on a daily basis.
More and more initial coin offerings started to pop up, each one of them hitting its targets quickly and without any serious hassle. This also gave birth to the so-called “whitepaper” fundraising model where, essentially, all a project had to do is write up a detailed plan of what it intends to do with the money, in order to raise it.
Looking back, one can easily see how the entire surge was based on nothing but speculation as pretty much everyone invested in those projects only for the returns they would yield following their listing.
And this had its effect on the ICO market, as crypto startups continued to raise tremendous amounts of money. Well, at least for the first few months of the year.
The year saw a total of 1253 projects raising around USD$7.8 billion. Yet, the graphic looks particularly different compared to that of 2017.
Interested started to fade away and for the entire 2019 so far, there were only 96 projects that managed to raise around USD$366 million – a fraction of the capital gained in the previous year.
Now that we saw how ICO progressed and, as it turned out, regressed, over the years, let’s explore some of the reasons for their demise.
Lack of developments
As we said in the beginning, ICOs had companies issuing cryptocurrencies that were sold to investors to raise capital for funding the project’s future development. A lot of these tokens, as they are also commonly referred to, served some utility as they could be used within the project’s own ecosystem for different purposes. Some tokens acted like equity stakes, giving investors rights to the revenues of the project to a certain extent.
But in order for all of this to yield any fruit and to become a working model, the projects had to deliver. They had to develop the products they promised.
That wasn’t the case, for the most part. In fact, it was recently reported that an overwhelming amount of ICO-based projects didn’t add a single line of code in 2019. To be more precise, out of 2000 reviewed projects, 640 from them failed to display any activity at all. More alarmingly, their current combined market capitalisation is more than USD$415 million.
The crypto winter
Another reason, which is more on the speculative side of things, is the prolonged bear market that cryptocurrencies saw throughout the entire 2018 and the beginning of 2019.
Bitcoin went from USD$20,000 in December 2017 to about USD$3,100 in November 2018. The entire market capitalisation of all cryptocurrencies shrank down to below $200 billion, becoming a shadow of its former self.
Altcoins, as all cryptocurrencies apart from Bitcoin are commonly referred to, went through even bigger declines. In fact, a broad range of them is currently trading at prices which are 90 per cent lower than their former all-time high values.
In fact, one trader invested 50 Bitcoin in 50 different altcoins, putting 1 BTC in each back in mid/late 2017. The losses he incurred range from almost 100 per cent to 70 per cent, depending on what he invested in.
Regulatory Hurdles
While at the beginning regulators were still trying to figure out how to deal with this new way of fundraising, this year we saw definitive actions on their behalf.
The US SEC recently fined Block.one, the publisher of EOS – an ICO which managed to raise more than USD$4 billion back in 2017 and 2018, with USD$24 million for failing to register itself as a security offering. The same thing happened to Telegram’s TON cryptocurrency, the token sale of which was halted under similar merits.
Regulators across the world are tightening their provisions regarding cryptocurrencies in order to protect investors after the bloodbath of 2018.
All of the above, coupled with new investment options such as Initial Exchange Offerings, which provided alternative to ICOs, inevitably led to the demise of the former.
The takeaway
Initial Coin Offerings could have been a very fruitful and hassle-free way of raising capital. They provided a fresh alternative to the challenging VC model and also lowered the barrier for retail investors to jump in early on in potentially prosperous startups.
Unfortunately, their run was for not. But it’s not because of the model – it’s because of the projects. A lot of people took advantage of the hype surrounding ICOs and simply capitalised on it, without providing any measurable results in return.
However, we can already see that things are starting to get better. Regulators are stepping in, large cryptocurrency exchanges are openly backing certain projects, providing the necessary due-diligence for investors to make informed decisions.
With that said, the cryptocurrency field is seemingly becoming more mature, and it’s particularly interesting to see how it will develop in the near future.
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Image Credit: worldspectrum
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