While the shadow of the bear market looms over crypto prices, another aspect of the industry has seen an even more drastic depression: initial coin offerings (ICOs). These call to actions from crypto fanatics and newbs hoping to get in on the ground floor of the next “bitcoin” seemed like a foregone conclusion through the end of last year and into the earlier half of this one. Although whether it was with a whimper or a womp-womp, ICO activity has diminished drastically.
Do You Remember ICOs?
ICOs raised a cumulative $2.2 billion in the third quarter of this year, which represents a drop of about 70% from the high of last quarter’s $7.3 billion.
It appears that while the market saw prices take their swan dives at the end of Q4’17, ICO activity did the inverse as Q1 and Q2 of this year both saw growth. Perhaps the market dips actually motivated investors to take more chances on these ICOs that promised those sweet, sweet gains that seemed so hard to come by.
So what gives? Well…that’s difficult to answer. But let’s bite into 3 spicy theories:
The Howie is one hell of a Test. ICO proprietors and investors exist with the mental state of Schrödinger’s ICO. An initial coin offering is either a decentralized commodity-like utility token or a profit-seeking security offering dependent on the centralized issuer. While the SEC and other regulatory agencies look the other way, in a sense both these descriptions are true and false at the same time.
However, regulatory enforcement has pushed investors to rethink. Symbolically, SEC Chairman Clayton remarked back in February that “every ICO [he’s] seen is a security” and in June resonated that notion advising ICO proprietors to “come see us”. More recently, CarrierEQ Inc. (Airfox) and Paragon Coin Inc. agreed to return funds to harmed investors, register the tokens as securities, file periodic reports with the Commission, and pay penalties in the SEC’s first foray. The SEC even went so far as to tie up Floyd Mayweather and DJ Khaled in a settlement for promoting ICOs.
As more pressure is exerted and more fear saturates the market, ICO launchers will refrain and investors will look elsewhere for safer investments.
Investors could have become more educated over the year. ICOs that over-promised and under-delivered have been publicized and absorbed into the decision processes of investors. A Boston College study found that around 50% of ICOs fail in 4 months, and another study by Statis Group suggested 80% of ICOs were outright scams.
Now the distinction between fail and fraud might be blurry, but the message is clear investors are getting more educated and thus more prudish with their capital. One could postulate that as the market matures there is less noise and more signal which could create a Pareto-like trend where a few “hygienic” ICOs get preference over the many “unhygienic”.
Is this a “Utility Token?”
The number of ICOs launching actually remains relatively stable, hovering right below 200 per quarter since Q4 of last year. The drop in total funding appears to be more emblematic of larger deals disappearing. For example, EOS and Telegram represent the first and second largest ICOs for 2018 (and all time). EOS raised $4.2 billion over approximately a year concluding in Q2’18, and excluding EOS actually drops the percent change of Q3 to just -30% vs. -70%. Telegram raised $1.7 billion in Q1’18 which was more than 25% of the total funding for that quarter.
It’s possible would-be premium large ICOs have backed out due to regulatory worries, but also because they might be able to secure funding from traditional venture capital. Blockchain startups raised $974 billion in Q3, representing a 17% jump. The number of VC deals also grew 28% to 248. A couple examples include Dfinity with a raise of $102 million and Bitfury with $80 million.
Whether effective or not, the SAFT (Simple Agreement for Future Tokens) has shown increased demand from VCs to accept blockchain companies into their portfolios. It is an investment security contract for accredited investors. This new creation, modeled off of the Y-Combinator SAFE agreement, allows for some of the bells and whistles of crypto but presumably more regulatory compliant, although the ink has not dried on that yet.
In conclusion, all these theories could have played a role in pushing ICO funding down. Whether this funding recovers in future quarters is still an open question. Perhaps as more middle-man platforms develop, like CoinList, we will see ICOs flock there for safe harbor. The SEC and other regulatory bodies could bring about more draconian measures to rid the land of ICOs and force more blockchain projects underground, and by underground I mean financial services oriented micro-nations *cough* Malta *cough*. Ultimately, investors will determine if ICOs are really worth investing in or if crypto is only about the existing large cap coins.
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