2017 will go down in history as the year of ICOs.
The issuing of tokens will revolutionize and deeply change the manner in which we handle financial assets.
In spite of all this euphoria, in the last weeks and months I threw most whitepapers into the shredder disappointedly and advise investors to be very cautious regarding Initial Coin Offerings, at least for the moment.
Just like in Kenny Rogers’ song “The Gambler”: „You got to know when to hold ’em, know when to fold ’em, Know when to walk away and know when to run.”
In the past, almost exclusively well-conceived infrastructureprojects chose the way of the ICO but now the supply of ICOs has rapidly turned into an overwhelming and hard to appraise wave.
Currently more than 1000 companies are planning an ICO. In the first quarter of 2018 ICOs already collected more venture capital than in the entire last year ($ 5.3 billion in 2017 vs $ 5.6 billion in Q1 2018).
In short, despite all challenges the euphoria is still unchecked.
However: it has become a lot harder and more complicated to follow and evaluate new projects. Without an extensive Due Dilligence Process an investment into an ICO can quickly vanish into thin air.
But enough philosophizing, here are my top 10 reasons why I’m currently following the spectacle from the sideline:
1. The regulators are on the prowl
There is a lot of regulatory uncertainty concerning the future legal assessment of Initial Coin Offerings. More and more companies are delaying their token distribution, sometimes for months, to obtain the necessary legal protection.
For ICO investors this means an involuntarily prolonged lockup of tokens and in the worst case the loss of the investment.
How quickly the situation can escalate shows the case of Centra an admittedly from the get-go dubios ICO (actively promoted by Floyd Mayweather). But still Centra collected $32 mio. last semptember.
In a nutshell: Most tokens have no right to exist and serve only as a quick and easy method to collect a lot of money without providing equity.
On top of that most ICOs show an utter inability to design sensible tokenmetrics.
At the end of the day it’s all about creating the right incentives for your ecosystem at a whole. Most teams seems to forget that as they most likely lack fundamental knowledge about economics, game theory and network effects.
In the coming years many utilitytokens will find their true value to be at close to zero.
In theory tokens should not map the future value or cashflow of the offered service but it’s current demand.
Speculation, hype and FOMO currently lead to sometimes utopian evaluations of utilitytokens of which the service or product they are based on usually still are in the “whitepaper state”. A gloriously absurd situation!
Additionally, down the road the danger of many utilitytokens in no way reflecting the success of the company exists. Tokenvelocity is the key word here.
3. Equity Tokens are the new ICOs
Welcome to the future.
In my eyes equity tokens are the true innovation made possible through Initial Coin Offerings. Instead of having to make up a point to a token out of whole cloth in the future the whole company will be “tokenized”. In the end an equitytoken serves the same purpose as a share only that it will be a lot easier and faster to trade thanks to the blockchain.
Additionally the tokenization leads to much higher liquidity of to date very illiquid assets like real estate, venture capital and artwork.
Who thinks these are wild flights of fancy should take a close look at the american cryptoexchange Coinbase. There they are in quite advanced Talks with the SEC to be allowed to list tokenized securities in the future.
4. No Market Fit
I do see a future in which real estate, artwork and companies are “tokenized” but a complete decentralization of our economy I think is unrealistic. Decentralized systems are slower and less efficient than their centralized competitors by conception. That tradeoff doesn’t make sense everywhere.
Many ICOs will primarily fail because nobody will make use of their decentral offering and consequently the token will have little utility and (the obversant reader might suspect it) it’s true value will find itself at zero.
But I don’t judge this process to be negative but rather a natural and healthy market adjustment.
We are still in the very early days of a revolution and have to go thorugh a lot of “trial and error” experiments until we find the best solutions.
5. Whitepapers with evaluations
Due to to me inexplicable reasons it seems to have become an established standard to ask for 20-30 Mio. during an ICO entirely independent from the actual capital requirements. In most cases only 30% of tokens are offered for sale, as well, which automatically leads to ratings of up to 100 million. For mostly nothing more than a whitepaper and a nice homepage that’s a really ambitious rating .
6. No exchange, no liquidity
Even Projects judged to be good by the community have more and more problems being listed on exchanges. BEE Token, STK Token, PundiX or Shipchain are only a few examples.
On the one hand the leading exchanges demand extremely high fees (which is quite prohibitive especially for smaller ICOs) and on the other hand regulated exchanges have big concerns to list potential securitytokens and are waiting for future regulatory developments.
This leads to tokens only being listed on small exchanges with low liquidity and to them being cheaper to acquire than during the ICO.
7. Who solves the scalability problem?
The choice of the right platform is a surprisingly rarely discussed point in the ICO community. During the investment into a blockchain startup you not only bet on the future success of that company (like in traditional venture capital) but also on that of the underlying platform. What does that mean?
When a token is launched on Ethereum, Neo or another platform it’s future is extremely tied to that of the protocol. If, for example, Ethereum doesn’t solve it’s scaling challenges all other ERC-20 tokens are about to fold as well. Change of the platform should be extremely complicated in such a case.
The to date most successful Ethereum application are the CryptoKitties. The blockchain game allows players to trade, collect and breed virtual cats on the Ethereum blockchain.
During the peak of the hype in last december up to 180.000 players collected these “valuable” cats. Subsequently they were responsible for up to 11% of the transaction volume on the Ethereum blockchain and caused, mind you for all users of the ETH blockchain, possibly record-breaking transaction fees.
What happens if in the coming 12 months several applications can register such an onslaught of users?
Of course, an irony of history is the fact that the most used blockchain dapp didn’t need an ICO maybe it even was so successful because of that.
8. What is the value of an idea?
As hard as it sounds ideas are a dime a dozen. 99% of them fail at their execution. Especially the development of “early stage tech” is extremely complicated and often doesn’t go as planned.
Let’s have a closer look at the augur project: In 2015 Augur collected 5,3 million through an ICO. 19053 Bitcoins to a price at that time of $236,50 and about 1,18 million Ether to a price at that time of $0,69. Good old times!
3 years later the platform’s development is still not finished. Admittedly the realization of Augur is extremely complicated and elaborate. But it’s still a graphic example of how time intensive the development of a produkt can be.
Many teams don’t nearly have the IT power of an Augur project at their disposal and often only plan employing the necessary developers after a successful ICO. A classic Mission Impossible since no occupational group is currently in more demand.
By now, collecting a lot of money with a good idea and a colorful whitepaper seems to be a matter of ease. Building a promising team, developing a product and marketing it with this money is the real challenge.
9. Millionaire and now?
Many teams are overwhelmed with handling the extremely high revenues of an ICO. With classical VC investing there are numerous rounds of financing that are linked to corresponding milestones. If the goals are met there’s fresh capital in the next round.
With an ICO the team gets the entire budget at once. This demands an extremely good and long-term financial planning. But there’s rarely a financial plan in whitepapers.
Another topic discussed much too rarely in the crypto area is dealing with the collected crypto currencies.
Is it more sensible to hold Ethereum or Bitcoin change it to fiat directly?
Let’s assume an ICO collected 30 million at an ETH price of $1200.
At an ETH price of $400 there’s suddenly only 10 million on hand.
Due to the high volatility of the crypto market it’s advisable to change the majority of ICO collections into fiat.
After all, investors haven’t invested into a crypto fond but into the construction of a company.
10. What would Warren Buffet do?
For my tastes there’s still too much euphoria on the ICO market and only a few investors have really been burned. There’s still a lot of confidence that several shittokens are going to be listed on exchanges soon. (Spoiler: Not gonna happen)
Beyond that the greed also reacts on the side of the investors.
Wanchain, which was “only” listed on Binance after 6 months due to several delays (ICO investors should get used to that) and “only” reached a tenfold increase, which led to long faces on the side of the investors, who dreamed of a hundredfold…
An ICO which in a bear market leads to such a return in a few months would bring traditional investors to cardiac arrest.
All these are signs for me that there’s still a lot to come from the low point of the ICO market.
I intentionally left fraudulent ICOs out of the list. Of course the biggest sceptics are right in that there are a lot of stumbling blocks and simply scams lurking in the crypto universe. A nice to look at homepage, a half-baked usecase and a pinch of marketing and the money machine is finished.
But personally fraudulent ICOs don’t worry me. With the necessary research and analysis almost all scams can be identified and ruled out.
The world of ICOs is not black and white
Despite all the criticism even in the current environment interesting investment opportunities reveal themselves again and again. One can certainly argue that even now there is “blood in the streets” and the perfect time to buy ICOs is already here.
About half a year ago China startled the crypto world with it’s ban on ICOs. Subsequently even allstar projects like ICON or Wanchain were barely given any heed which later turned out as perfect anticyclical investment.
This time not only chinese regulators are hunting token creators but more or less the entire western world.
Additionally numerous far developed projects are in descent and can be had significantly cheaper than just a few months ago. Even potential “all star projects” have partly fallen by 70% or more in the last months. An investment here should be a lot less variable (as far as something like that can be said in the cryptomarket) than in an ICO.
Whoever still would like to invest in ICOs should in my opinion focus on protocoltokens and should only enjoy all kinds of utilitytokens with a lot of caution.
Only after clear guidelines have been defined by regulators will it again make sense to analyze a broader spectrum of tokens. The latter might be interessting shortterm investments (“flips”) but will most likely get outperformed on the long run.
On the contrary, there is a lot of innovation happening on the protocol layer. The smartest tech minds in the world are actively looking for scaling solutions for DLT systems and are presenting new ideas nearly every week.
So there is still a reasonable chance to spot the “Google” of tomorrow and participate at the Seed/ICO stage.
ICOs are and remain one of the best and most exciting innovation of the blockchain world. The venture capital likes to paint a picture of genius entrepreneurs and cunning venture capitalists changing the world together. Surprisingly the business modell venture capital has successfully defended itself against any innovation – until now. The decentralization of the VC model offers the chance of a long overdue democratization and maybe even lasting improvements.
It offers entrepreneurs the freedom to realize projects that were, to date, ignored by VCs as well as an easier and less complicated option to gain capital.
But in my opinion the largest innovation will take place beyond startup funding. The “tokenization” of real assets like real estate, art work and companies will have a strong impact on the way we handle assets.
Yes, like any other innovation the “tokenization” will go through an evolutionary process we are only at the very start of. And despite all of my scepticism toward the current ICO offerings I am in an extremely positive mood and full of anticipation for what the future holds for us.
In my eyes utilitytokens in their current form only have a limited shelf life, equitytokens could be the future.
Like Kenny Rogers sings: „You got to know when to hold ’em, know when to fold ’em, Know when to walk away and know when to run.”
Become part of the CryptoGo Community and join our exclusive Telegram channel!
Should you have further questions, found mistakes within the review or would just like to discuss the newest developments in the cryptoworld with the CryptoGo-team then become part of the CryptoGo community and join our Telegram-Channel.
I am always happy about feedback: florian[at]cryptogo.de
CryptoGo has the aspiration to transparently and independently report on and evaluate new ICOs. In doing so we create the articles to the best of our knowledge and belief. But the reports and evaluations on this site only reflect our own opinion and in no way are meant to issue investment advice. Every investor should extensively investigate the presented ICOs and analyze and asses them to their own standards.