By this spring, the hullabaloo around using ICOs to raise funds has quieted considerably: fewer and fewer companies are announcing plans to issue tokens, fewer events with the prefix “crypto-” are being held, and the ones that already exist are not garnering the same amount of attention. The accounts belonging to founders of “promising projects” have become less and less exciting, while “ICO” and “scam” have become ever more tightly intertwined in popular exposés.
Nonetheless, in addition to the series of scandals in which major ICO projects disappeared along with the funds they raised, the buzz around tokens showed that even large investors are willing to invest in various industries and markets, including projects that have nothing but an idea. It remains to be seen whether real-sector businesses will be able to make use of this for their own development.
Fraudsters, Hackers, and Bitcoin
According to CoinDesk, in the first quarter of 2018 ICO projects raised over $4.5 billion, not including Telegram’s offering, but in April they raised only just over $500 million, which is the lowerst in the last eight months.
There were plenty of reasons for the “cooling-off” we’re seeing now, starting from the actions of regulators cracking down on this rapidly-expanding market to the behavior of the projects themselves, as they took their time launching promised alpha and beta versions of their products. The topic is no longer being heated up from inside or outside: regulation issues are being discussed less and less frequently, no statutes have been adopted, and there are ever fewer bans (or threatened bans) on ICOs or cryptocurrencies.
The ICO market has been remarkably stable the past year. According to estimates by the consulting company Satis Group LLC, which conducted research on the state of the world’s ICO industry, about 80% of projects are fraudulent, and only 8% achieve being listed on trading platforms.
There were plenty of major scandals in the industry in the past year. LoopX disappeared in February 2018, after raising $4.5 million for an investment platform with patented trading algorithms. In January 2018, the Benebit project, which had long received positive reviews, raised $2.7 million and deleted itself after users discovered that the team photos had been taken from the website of a British school.
Hackers have also created additional threats for the market. A study by Ernst & Young (EY) into the risks associated with investing in cryptocurrency says that over 10% of funds raised by organizers of initial cryptocurrency coin offerings were stolen in hacking attacks.
The significant drop in the capitalization of cryptocurrencies in early 2018 exacerbated the situation. The wave of ICOs was in large part tied to the rise in Bitcoin prices, which is why the drop in the price of the main cryptocurrency inevitably also led to decreased interest in investing. And even though crypto optimists claim that a second wave of explosive growth is just around the corner, it’s clear that the buzz on the market has died down.
Experts in financial markets are skeptical. Recently, the investment bank GP Bullhound published a forecast saying that within the next 12 months the price of Bitcoin and other cryptocurrencies will suffer a 90% correction, which will “erase the mass market.” At the same time, Sebastian Markovsky, the director of GP Bullhound and lead author of that report, believes that the ICO market will continue to develop, but that investors will no longer invest money in an ICO without any specific proof that the investment will be profitable.
An Idea Is Not Enough
And profitability, by the way, is becoming harder and harder to believe. ICO projects have almost no interaction with investors after funds have been raised. Many of those who raised millions communicate very poorly on what is now happening with the project. And this breeds conjectures that blockchain is being used as a cover for basic greed.
In just a few months, ICOs gained the reputation of a fast and easy way to attract investment. Before the beginning of 2018, everything was simple: write a White Paper, make a site, launch some ads, give a couple interviews, and the money will flow in. Investors did not demand to see a product or a prototype – nice-sounding promises were enough for them.
But the age of easy money ended quickly. Regulators from various countries have asserted numerous times that they are willing to stand up for investors, to bring order to the industry and bring it as close as possible to the securities market. Jay Clayton, the chairman of the U.S. Securities Exchange Commission, announced in February that all tokens are securities. He reaffirmed this position in late April. The Japanese Financial Services Agency is also working on regulating and legalizing ICOs, and similarly proposing that ICO tokens be considered securities.
In trying not to get roped into scandals and litigation, the major advertising platforms – Facebook, Twitter, Instagram, LinkedIn, and Google – applied their own restrictions to ICO projects, banning advertising for cryptocurrency projects. Having lost major media resources for promotion, out of necessity ICO projects started getting creative in order to attract investors and raise the funds they planned. They found support from PR tools, which had previously been less of interest to the market, since clients and contractors always had difficulty agreeing on ways of measuring effectiveness.
At the Tipping Point
Thus, under the influence of internal and external factors, the market has reached a tipping point: the wave of hype has receded, along with investor interest, and there is no evidence yet that ICOs generate income for anyone other than their initiators. 2018 will show us whether the system will remain in a chaotic state or rise to a new level.
Nevertheless, the ICO industry has indirectly been a huge benefit to the real-sector business world. It saw that it is possible and necessary to quickly raise money, without wasting years writing business plans, kowtowing to banks or venture capital funds. The market included projects seeking funds for new factories, equipment, and development of an existing business. Unfortunately, they always collected less than the usual super-ecosystem or mega-social network projects. But they made it clear that investors are willing to believe in a project if it is public-facing and packaged to be accessible, and if its founder-owners are open and willing to communicate.
The issue of low fundraising in real-sector ICOs has a lot to do with the fact that blockchain was too artificially tied to the sector, and the businesses’ tokenization appeared insufficiently transparent. But even unsuccessful ICOs made real businesses understand that it’s not enough to just wait for investors. It’s time to talk about yourself, work with your target audience, promote yourself and your brainchild. The next few months will show how quickly business will act under these new conditions and what tools it will use. But we can say for sure: the demand from clients has changed over the last three months. Instead of “We want an ICO,” now more and more often they’re saying “We need investment.”