Investing in fundraising startups was always risky, especially in cryptocurrency projects, as they are unregulated by their very nature. If you are not careful, you might not lose your profits only but all of your funds as well. This article tackles the ever-hot topic of ICOs, it’s earlier and recent developments while looking out for the future of the industry.
The stagnation in October/November
The ICO market has seen the rise towards stars in mid-2017, with market cap growing over $1.5 billion at the period. Then, October came up and numerous events led towards stagnation of the market in terms of ICO numbers and ROI figures for investors. The overall cryptocurrency market grew by 23% in October when compared to the previous month, driven almost exclusively to bitcoin.
ICOs, on the other hand, fell short of the June’s record by a large margin, falling down in the value of startups by 1% when compared to September. The number of ICOs still rose tremendously towards 68 projects. That piece of information can bring only one conclusion – people have stopped investing in the ICOs in the month of October.
According to the Argon data, only 16 ICOs managed to close the projects. They had above $6 million of collected funds, which is averagely 60% of the targeted value. These numbers might be near to the October top performers but when you add the top with the middle and bottom, you get a sharp fall in average fund per ICO.
November is performing slightly better than October in terms of value, as the mid-month funding reached nearly $500 million. This number can be really misleading, as the major driver for the growth was the value of bitcoin. The cryptocurrency grew almost three times since the beginning of August and still does. Since ICOs use either BTC or Ethereum, the value of these coins affects the overall fundraising value. According to the “coinschedule”, November was also the month of ICO number cut.
Using the “tokendata.io” information about 100 ICOs from October and November, about 20% of the ICOs have failed in the period.
As for the ROI, the ICO range widely in success, as the time is yet to show how successful these projects really are. As for the moment, we can take a look at selected top 10 ICOs ROIs:
|Start||Name||ROI since start||Raised Funds|
|Oct||Request Network||9,0%||$33.3 million|
|Nov||Raiden network||574%||$31 million|
The top 10 ICOs represent the largest projects in terms of collected money. 40% of the top ten have negative ROI, which is the difference between beginning price and the current value of the bought tokens. Another fact is that these ROIs are a lot smaller than those started in July and August 2017.
It is important to note that other, hidden costs have not been calculated in the ROI figures. These costs are payment fees, miner fees for transferring the coins around, potential management fees charged by the ICO team and other costs.
It is clear that October and November were the months of slowed growth in terms of both value and number of ICOs. It is important to investigate the issue and uncover the reasons behind such development. After careful analysis, we did come up with several reasons why such trend happened in the first place and why it might continue even further down the road.
Stance of Governments on the ICOs
Since the mid of 2017, governments of all around the world took notice of the industry. The US SEC has provided the guidelines on the ICO regulation. These policies imposed taxes on funding and income of the parties involved in the project and demanding transparency.
Many of the ICO owners have thus pushed towards illegal zone by not providing their identities. This amplified especially after CFTC acknowledged the tokens as commodities, agreeing with the SEC statement.
U.A.E., UK, and Japan have all taken similar stances on the ICOs, while EU remains to be largely undecided as of yet. Each of the EU member states has their own policies on ICOs, mostly negative in opinion.
China is the only country that banned the tokens altogether effectively pushing ICO industry out of its borders. Since the country has a large financial market that is hard to control, ICO projects have been on the aim since their boom in mid-2017.
To illustrate, approximately 65 Chinese ICOs raised almost $400 million from January to July, marking up a large portion of the global ICO industry. With the market closed, the overall industry suffered greatly.
On the other hand, countries like Switzerland and Singapore have provided policies that were privacy-friendly towards ICO owners. Thus, these regions became quite popular within the ICO industry, drawing in developers to create their ICO within their borders.
The Bitcoin and Ethereum Forks
Another major events that brought about the stagnating of the ICOs in the October and November, was the Ethereum fork. Ethereum Byzantium on October 16th brought improvements in terms of processing and securing data for transfers. On the other hand, the mining of these coins was brought down significantly due to increased difficulty.
The fall of ETH value and sharp increase of bitcoins brought more people to trade the coins, rather than provide them to ICO owners. Another fork that was supposed to happen in mid-November, Bitcoin hard fork Segwit2x added the pressure. Although postponed, most of the countries and traders were not ready to accept the changes proposed by the newest fork, according to medium.com. This, in turn, has brought down the bitcoin value, with tokens from ICOs dropping as well.
Scams and Bad Publicity
During the July boom, many of the ICOs turned out to be scam schemes, bent on taking the funds from investors and never to return. Although there is no official number of scams within the ICO industry, they are quite common according to Joseph Lubin and Brad Garlinghouse, owners of Ethereum and Ripple respectively.
This was especially true in the booming months of July and August. Even SEC (U.S. Securities and Exchange Commission) has released an official statement, warning investors to stay away from ICOs due to large number of frauds, according to CNBC report.
With many people fooled by the developers, a general distrust now follows ICO projects. The distrust grew, resulting in fewer people willing to risk their savings and invest in the fundraisings. Cointelegarph mentions a number of $225 million lost in phishing crimes in 2017 only, which is almost 20% of the total ICO market cap.
If we go back to the figures presented at the beginning of the article, you will see that number of ICO has risen drastically, even in the period of stagnation. The ones from the beginning of 2017 and even in 2016 and earlier, still exist. Add to that exchanges, brokers and P2P marketplaces and you have one large cryptocurrency market, with so many people and businesses screaming to get your attention.
This would lead towards oversaturation of the market, as it was the case in October and November this year. Coupled with regulatory issues and forks, ICO number and value was sure to drop. The number of scams and failed ICO crowdfunding projects put a dent in the marketing plans of the developers.
As time passes, investors are demanding more information and security from the owners of the token owners. Thus, marketing of the release became even more vigorous and costly than it was the case just a few months ago.
The Future of ICOs
It is hard to predict where things will go from here. On one hand, government bodies are trying their best at controlling the market and impose regulations on the industry. On the other, cryptocurrency communities are trying their hardest not to fall down to that path. The idea of the tokens is to ease up the communication and transaction speed while making a profit.
Thus, many of the ICO owners would still remain anonymous as long as there are people willing to risk and buy these tokens from them. AS New York Times stated, even though China did forbade the ICOs within its borders, it still struggles to implement the ban.
Thus, we deem that industry will prevail in the future. It brings innovative solutions to the crypto table. The issue would still remain on how to hedge against scams and what growth the industry would experience in the coming months due to the tighter regulations.