Despite the massive drop in the value of cryptocurrencies in 2018, investment into ICOs has soared. This may reflect a return to the fundamental purpose for ICOs which is to fund innovation.
It’s hard to believe that the first ICO was launched only in 2013.
A software engineer, JR Willett, wrote “The Second Bitcoin Whitepaper” in 2012, explaining how you could build a new protocol layer on top of Bitcoin and could fund its development by telling people what your idea was, telling them what your address was and offering a piece of the protocol to anyone who sent coins to that address. No-one listened to his crazy idea until he proved it himself with the launch of Mastercoin (now called Omni). He raised 5,000 Bitcoin.
Five years on, ICO’s have become part of the lexicon. Most are based on protocols built on Ethereum rather than Bitcoin, but the idea is the same.
So, what has happened in these five years, and what is the status in 2018?
ICOs in 2018
A PwC report has found that by June 2018, ICO volume was already at $13.7 billion — double the $7 billion for 2017. According to Coinschedule, the total had risen to over $20 billion by September. Two very large ICOs contributed to this:
· The end of the year-long EOS ICO that raised $4.1 billion and
· The Telegram ICO that raised $1.7 billion.
Even without these two, however, the first six months of 2018 raised as much as the whole of the record-breaking previous year.
The leading hubs for ICOs are Switzerland, the US and Singapore, with smaller places like Hong Kong, the Cayman Islands and the British Virgin Islands also attracting ICOs because of their crypto-friendly models. The UK is starting to make inroads, and Lichtenstein, Gibraltar and Malta are positioning themselves as ICO-friendly.
There has been an increase in regulation in many countries, which seems to be giving some stability to a volatile market. According to Daniel Diemers, one of the authors of the PwC report, the more the legal compliance and investor relations aspects of ICOs improve, the more success there is likely to be for ICOs. There is also a trend towards combining ICO crowdfunding with traditional Venture Capital funding. This will serve to validate the business models and at the same time build a large community of support. (You can read more about this trend here.)
Investment into ICOs has risen dramatically in 2018
The report cautions that new capital may not be coming into the market. Rather, it is people who already own BTC or ETH that are speculating in new coins and tokens.
Investment into ICOs has risen dramatically in 2018
What is driving the growth of ICOs in 2018?Certainly, during 2017, the promise of continuously rising value in cryptocurrencies would have been a major driver of support for ICOs. Bitcoin surged from $1,000 in January to $20,000 in December, pulling the altcoin market with it. However, in 2018, this is probably much less of a factor. The value of crypto has shrunk by about 70% since the peak in December 2017.
So, what seems to be driving the growth of ICOs in 2018? It would seem that two of the factors are a long-term return on investment and the rise of genuine use cases for cryptocurrencies and the underlying blockchain technology.
Long-term return on investment
- Some stats on ROI
It’s difficult to make a call about ROI. According to coinist.io, as at the end of Q3, 2018, the average ROI for coins in their directory was 4,394%. The top 100 ICOs averaged over 13,000% and the top 10 ICOs averaged over 130,000%. So, it sounds as if investors are making very good returns.
However, the average is being skewed by the massive ROIs of just a few of them. For example, the open source payment network NXT has ROI of 1.2 million percent and Ethereum over 74 thousand percent.
Of the 480 ICOs listed on the Coinist site, only 98 were actually showing a positive ROI. This is just 20%. Over 27% (131 ICOs) had lost more than 90% of their value since launch.
Most of these losers, obviously, were from 2017 and 2018. According to one analyst, only 50 of the 902 ICOs from 2017 made a 5x return or more. Of the 142 ICOs of 2018, only 12 are showing a positive ROI. This includes the hugely publicized EOS, showing an ROI of over 480%.
As with many statistics, meaning can be distorted. For example, NXT, the top-performing ICO, launched in 2013 with an opening price of $0.000006. Its massive ROI of more than a million percent still takes its price to less than $0.07. So early investors may have made astronomical returns but would have needed very large numbers of coins for the actual amount to have been meaningful.
Trying to work out what is happening with ROI is not helped by the fact that so-called expert sites give very different figures. A good example is the following huge difference in ROI given for IOTA:
ROI on ICO for IOTA — 30 September 2018
If the same definition of ROI is applied — (Gain on investment — a cost of investment)/cost of investment — it’s hard to work out why there should be these discrepancies.
- Comparing ICO and traditional investment returns
Interestingly, however, 50% of the 41 ICOs prior to 2017 are showing positive ROI. And the PwC report mentioned earlier has shown that 65% of the 20 top-funded ICOs are on track or are showing success. About 10% don’t yet have a product, 20% have major legal, team or technical problems and 5% have been dissolved.
This profile would be no different from a list of traditionally-funded start-ups. According to one Angel investor, when discussing his investments: “Roughly 40% are failing or have failed, 20% of businesses are surviving, 10% are making revenue but running out of runway, 20% are growing and looking up and 10% are doing really well”.
The expectation of ROI running into thousands of percentage points is also somewhat naïve. Venture capital funds have returned an annualized 26.1% over the past 15 years and 30% over the last 20 years — and they clearly believe that this is worth staying for.
Investors into crypto-driven ventures may be learning the same hard lessons that investors into traditional ventures have learned over the years. It’s not easy to pick the winners! And it may take time and patience to get a return. The classic advice to “buy low, sell high” is unfortunately not applied by new and often greedy speculators into ICOs.
ROI for ICO-backed start-ups is similar to ROI for VC- and Angel-backed start-ups
The rise of genuine use-cases for crypto-currencies and blockchain technologyIt may be that support for ICOs in 2017 was too much driven by the prospect of short-term speculative gain. Investors may have forgotten the core purpose for having an ICO: to enable the funding of an innovation.
Use cases for blockchain technology are now proliferating — and founders and developers are looking for funding to realize their ideas. Multiple solutions are being developed in the form of Dapps, mostly on the Ethereum blockchain.
An analysis by Coinschedule shows that by September 2018, there had been 791 ICOs, spread over 35 different categories. The largest category, making up 24%, was infrastructure: platforms, exchanges, smart contracts, etc. The next 4 categories were mainly in the financial sector, as we might expect: finance, communications, trading and investment and payments. However, the rest were in areas such as gaming and VR, supply and logistics, data analytics, machine learning, data storage, IoT, drugs and healthcare, sports, recruitment, content management, real estate and even art. This move to diversified areas of business is confirmed by monthly analyses of ICOs by ICO Bench.
These businesses all have particular problems that can be solved by new technologies, including tokenization and decentralization. In fact, tokenization of real-world assets is said to be one of the driving forces for the disruption of traditional financial systems and for bringing trillions of dollars’ worth of investments to the cryptocurrency world. (Read our article “Security tokens: Tokenization of real-world assets” for more information on this.)
This focus on real-world use-cases is surely a driver of the significant rise in the number of ICOs and in the amounts raised during 2018.
The core purpose for an ICO is to fund an innovation.
ICOs — the futureSo …… despite all the hype, the talk of bubbles and busts, the loss of many investments, ICOs are growing in number and strength.
In its summary, the PwC report makes some suggestions about ICO best practice. It’s not surprising that these recommendations are suggesting that ICOs move closer to more traditional funding models:
· The fundraising process should be done in rounds to increase transparency and to be more clearly needs-based.
· For the same reason, funds should be released to the development team in a staggered fashion.
· More attention should be given to early or pre-ICO funding from VCs to diversify funding sources and to validate business ideas.
· Legal, regulatory and governance requirements should be given more focus. This includes KYC and AML steps for potential investors. It also includes more focus on cybersecurity.
· Investor relations needs more attention. This can be achieved via smart contracts, clear communication during and after the ICO and even imposing a lock-up period for investors to force them to weigh up the risks more carefully.
Adding an investigation into an ICO’s approach to some of these recommended criteria may be a useful step in due diligence. Making sure that there is a genuine use-case may be another.
At the end of the day, what really separates ICOs from traditional funding models is that they open investment opportunities to everyone. So, the more attention that is given to building communities of interest and ecosystems rather than just technical solutions, the more likely it is that an ICO will be successful.