A new era for ICOs
It’s safe to say that 2017 has been the year for Initial Coin Offerings (ICOs). For the uninitiated (excuse the pun), an ICO works similarly to an IPO, except that instead of shares, crypto-tokens are issued to the investors. That difference has brought about a whole wave of funding which was previously unattainable for small entities, with hundreds of millions in U.S. dollars being invested in ICOs over the past few months.
Suffice it to say that the largest ICOs this year (Tezos, Bancor, and Status) collected a cool half a billion U.S. dollars in funding between them. In other words, 500 million USD. Whichever way you put it, that’s a heck of a lot of money, and concerns have been put forward on whether any start-up needs that kind of money to build a blockchain product. Most of the ICOs are bought into for pure speculation, with the token price normally rocketing after listing on an exchange, and a dip in the price happening soon afterwards, sometimes even going below the ICO price. And speculative value is indeed the main driving factor behind the price, as most of these ICOs do not even have a beta product ready by the time of the ICO, let alone a viable public one ready for launch at the end of such ICO.
All that however may be set to change after the latest downtrend in the total market cap of cryptocurrencies, which fell by almost 50% from its previous all-time-high a few weeks ago. The next bullish wave might be in the offing (in my opinion a sizable one is due by the end of September), but investors who entered at the peak should be a bit more wary this time round. That, coupled with the fact that the Status ICO has shown us that blockchain technology is still in its infancy when we witnessed the Ethereum blockchain being brought to its knees with the overload of transactions, will make for an interesting new environment for any upcoming ICOs.
Let us also not forget that 2018 will be the year where most of this year’s ICOs will have to abide by their word and deliver a working product as promised in their roadmaps. Will they all do so? Of course not. We live in an analogue world no matter how much we try to digitalise it, and problems will arise which will shift the goalposts and postpone milestones, not to mention that some ICOs will most likely fail to deliver a product at all. It will be interesting to see what sort of legal recourse the investors will have should that happen.
Speaking of laws, the U.S. and China have already made it clear that they intend to regulate ICOs. The Securities and Exchange Commission (SEC) has already expressed its disapproval of ICOs in the past, and the People’s Bank of China (PBOC) wants to bring ICOs under its thumb. Indeed, ICOs as of late have been excluding U.S. citizens from participation due to the contrary position taken by the SEC, and it’s only a matter of time until other jurisdictions start enacting regulation on the matter.
All this makes for an exciting mix that will see ICOs taking a different path than to what was trodden on up until now. ICOs are here to stay, but there will be a lot more focus on the value attributed to the crypto-tokens being issued in exchange for the investors’ funds; such crypto-tokens would need to have an inherent use for the underlying platform being funded through the ICO. Any ICO which is simply racking up funds in exchange for tokens which are not inherently useful for the platform (in other words, any other cryptocurrency can be used for the platform being proposed) will have a harder time than before to attract investors. Moreover, at the very least investors will want a working product, even if still in its testing phase, to convince them to part with their hard-earned money. Lastly, the teams behind ICOs will be scrutinised in greater detail, and one can certainly trust the crypto-community in spotting and weeding out any bad actors in such teams.
To conclude, ICOs bring about an interesting mix of crowdfunding and venture capital, at times surpassing both in the funds collected while making participation even easier as long as you have the corresponding cryptocurrencies to invest. However, I am definitely eager to see whether I’ll have to eat my words should all ICOs deliver on what they’re promising, or whether it will be a case of bolting shut the barn door after one or more ICOs do a Houdini (Horseini?) with the investors’ funds. I believe that for each legitimate ICO there will be one other which is the mirror opposite, but after all that holds true for any other venture in other markets.
Disclaimer – this is my own personal opinion and does not reflect that of any other person, whether natural or legal. I act as an advisor to select ICOs in my own personal capacity. Please feel free to contact me on firstname.lastname@example.org should you wish to discuss this article further – Jonathan Galea