The Strategist

Farewell to ICO: The era of cryptocurrency crowdfunding is over

01/11/2019 - 11:46

Analysts were sure that the ICO market was nearly dead at the end of 2018. The new way of financing projects that took off two years ago failed to stay in the active growth phase even for a year and eventually collapsed, dragging along dreams and hopes of failed millionaires from Instagram.

Public Domain Pictures
Public Domain Pictures
It was expected that 2018 would be a year of purification for a new industry. Everyone who promised to launch beta versions of projects and hadn’t spent the investor money, would finally show what they promised; the level of financial literacy would increase and there would be nothing left to for scams, and Bitcoin would at least enter some phase of stability.

At the end of 2017, there was a hope that those projects that emerged at the end of the hype era, would be more responsible with regard to using the ICO as a financing instrument. At least, those who applied for consultations started preparing for the placement of tokens in advance, working on prototypes of products before the stage of actively collecting money, interacting with the audience all the way and not only in the start phase. But even this did not save the market.

In the second half of 2018, it became clear that the fever ceased, and there were few prospects for the industry. Investors need not vague promises, described in white papers, but clear guarantees that the projects will be launched, and investors' money will bring profit.

November 2018 was the most unsuccessful on the ICO market since its inception. According to the analytical company Diar, ICO projects managed to raise only $ 65 million in December. On average, this figure was $ 1.2 billion per month, while at the beginning of the year (January-February) the stakes were at $ 2.5 billion. According to Diar’s report, ICO-projects have attracted $ 12.2 billion in 2018 in total. 

Going lower

One of the main reasons for the collapse of the ICO market, of course, was the fall in rates of the main cryptocurrency. Over the past year, the price of Bitcoin has decreased fivefold. In December 2017, the cryptocurrency exchange rate overcame the $ 20,000 barrier, but fell below $ 4,000 in December 2018.

Analysts attribute such dynamics to influence of three factors: interest of institutional investors planning to buy cryptocurrency at the minimums, hard forks with Bitcoin Cash and decision of the US Securities and Exchange Commission (SEC) on sanctions against the AirFox and Paragon projects, which were obliged to register tokens as valuable papers, return money back to investors and pay fines.

In general, future prospects of Bitcoin look very vague: there are several scenarios, and they all depend on both actions of market participants and efforts of authorities in the legislative field. Over the past year, regulators in different countries have consistently tightened requirements for cryptocurrency and ICO. Japan, Singapore, Hong Kong and Estonia announced more stringent approaches to the regulation of the cryptocurrency sphere.

In December, Head of the US Securities and Exchange Commission (SEC), Jay Clayton, said that ICO can be an effective way to attract investment, but at the same time, they still have to respect legislation on securities. Following this, SEC consultant on digital assets and innovations Valerie Szczepanik explained that issuers of ICO tokens in the United States can receive a so-called non-action letter from the commission. In some cases, it may allow to bypass regulatory requirements, but the main condition is not to harm investors.

Sheer disappointment

Investors who have invested in ICOs have already suffered serious losses. According to EY, which analyzed the most notable ICOs for December 2017 and then checked their status for October 2018, 86% of tokens now cost less than during initial placement.

The last year was a period of disclosures: projects that were supposed to show not only prototypes but also working models could not evolve into real business. It was difficult to launch promising startups. As a result, part of ICO entrepreneurs continued to spend money on operations in major projects, and some just bought expensive cars.

In the second half of 2018, optimism of the ICO crowd diminished. There were no results to report to investors. The most resourceful even promptly launched projects that could be implemented in order to meet deadlines and at least show something to buyers of tokens.

According to EY analysts, reduction in the cost of tokens for most projects may be explained by the fact that teams that conducted the ICO did not demonstrate sufficient commitment to their ideas and coins. Thirst for profit was stronger.
In addition, cryptocurrencies and blockchains were not well connected with many types of businesses that tried to raise money through ICO. In most projects, the need to use the blockchain as a technology was not at all obvious, and the market was ruled not by crypto-enthusiasts, but by those who quickly realized that it was not necessary to implement projects.

According to the Cointelegraph, in the third quarter of 2018, 19% of completed ICOs had already deleted their websites and pages on social networks. In the second quarter, this figure was half that.

Scams have also contributed to the collapse of the ICO industry. Diar analysts have found out that since July 2016, fraudsters stole almost $ 100 million during the ICO.

As a result, the ICO market turned out to be much cleaner by the end of 2018: the market got rid of all the superficial and the former “financial geniuses” now either frantically think what to do or are hiding in warm countries. Crypto-conferences became quieter and calmer, and even the market slowed down.

What will happen next

The number of experts in the promotion of financial projects seemed incredible in the fall of 2017: ticket sellers and managers with one month experience tried their hand at promoting ICO startups.

In the middle of 2018, all the new-minded “pros” returned to their previous occupations or began to actively update their CVs, and ICO agencies that grew like mushrooms earlier, closed just as quickly without surviving the fall of the market.

Remaining ones started using words like “optimization”, “reduction”, “KPI”. And even representatives of cryptomedia have learned to be polite, to respond to letters in time and give discounts to agencies that previously seemed unthinkable.

There are no hopes for the revival of the ICO market in previous volumes. But there are plans for a new tool. STO (Security Token Offering), adjustable placement of cryptoactive assets, may ignite new fever on the market. By rejecting decentralization and relying on state control, investors will be able to get the much-expected reliability and transparency.

The former excitement, of course, will no longer persist due to severity of the regulation, but the ICO pool that has dried up by the beginning of 2019 can easily be stirred up and launch a new wave of hype. Crowdfunding is necessary for businesses in one form or another, just as the market needs both blockchains and cryptocurrencies.