Initial Coin Offerings or ICOs have become the new worldwide fundraising phenomenon.
To date over $6.4 billion has been raised globally. In December 2017, the ICO market surpassed the $1 billion per month mark for the first time.
In 2018, I expect that we will continue to see this market grow rapidly and shatter new heights with hundreds of projects already on the calendar and many more to be announced.
It all started fairly humble, back in July 2013 Mastercoin held the first ICO that raised about $5 million in bitcoin (BTC). Ethereum followed in 2014 by raising $2.3 million in the first 12 hours of the crowdsale. It was not until 2017 that ICO mania started. That same year, the largest ICOs like Status, Filecoin, and EOS have raised over $250 million each. Telegram’s ambitious crowdsale planned for 2018 aims at raising a mind-boggling $1.2 billion.
From Humble Beginnings to Wild Innings
In the beginning, a Token Sale was a vehicle for smart startups to raise money — money they would have had a hard time securing from traditional venture capitalists (VCs). Many of the people involved with these ICOs were not excited about the prospect of giving up solid chunks of their companies to bankers and financiers. Let us not forget that the cryptocurrency movement was born to challenge the status quo of the “established” world.
Bitcoin’s meteoric price growth in pair with ample media coverage has attracted many new, often inexperienced investors. As waves of new money pour in, many fraudsters and scammers have appeared. Before the SEC stepped in to weigh in on the issue, startups that popped out of nowhere like mushrooms after rain were crowdfunding tens of millions of dollars in days, hours, or even minutes. The majority of them doing so only on a concept. Most white papers have been reduced to infographics. Plagiarism and creating “credentials” out of thin air was common.
The summer of 2017 was clearly the Wild West season of ICOs. Almost every and any ICO would sell out. Virtually every one of them would grow between 100% and 1000% after listing on the exchanges, often instantly. I don’t recall a single Slack channel that wasn’t plagued by individuals attempting to impersonate team members in order to scam people out of their Ethereum (ETH).
This impersonation issue became so widespread that it eventually lead the whole cryptoworld to abandon Slack in favor of Telegram.
At this point, everyone wanted to get in. Payment platforms, real estate funds, social networks and content management companies all wanted to be on the blockchain. Everyone wanted to have an ICO. An increase in quantity was proportioned to a decrease in quality.
Don’t get me wrong, not all of the ICOs were bad. For every 20 scam/bad/questionable projects there was a diamond in the rough, a true gem. My favorite ICO will always be Project 0x. It really captured the spirit of the original idea of a token sale. It was perfect in its simplicity — it offered no bonuses, no pre-sales or incentives for large investors. Everyone who wanted to get in and passed the whitelisting process was given a fair chance to buy. The number of tokens for sale was equally divided among participants.
Most importantly, 0x had a working product, a great team, a real white paper and a swollen GitHub repository. By leveling the playing field for participants they truly made this sale decentralized. I would not expect anything else from a DEX protocol.
Structure
Token sale structure and distribution models are one of many fascinating and controversial aspects about ICOs.
It’s one of the big checklist items every potential investor and company having an ICO should be paying attention to.
A bad sale structure can ruin a solid project’s ability to raise enough funds and hinder its future success.Huge bonuses for large investors participating in the high minimum pre-sales have been responsible for many tokens going well below main sale prices during fall of 2017. The “greater fool theory” was in high gear as early participants were in 50%-100% profits even before the crowdsale ended.
I’m going to dig a bit deeper into how rapidly and drastically those models have changed over the course of the last two years. Crypto is an ever changing environment that is rarely calm. It’s like a storm that keeps on going, many perishing as it rages on. Those who survive do so by constantly adapting to the changing wind and sailing forward and being able to let go of the old ways.
Evolution or Pollution?
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In early 2016, there were about 30 ICOs. Most were aimed at raising under $10M, with most not surpassing the $3M mark. Between 70% to 90% of token supply was offered for sale. Team and founder’s token allocation ranged from 8% to 15%.
We can see the decentralization spirit at play here with a large allocation to public sales.
In this era, startups were thrilled just at the prospect of raising funds via token sale. In most cases, all the different aspects of token sales, such as marketing and PR were run in-house with the help of community members. The token sales did not attract many newcomers either. This was still a “closed” space that the general public did not talk about.
In most cases, products were in early stages of development and tokens were not distributed for many months after or until the mainnet was ready. Some true gems emerged from this period despite not raising much money. ARK’s token sale brought in less then $1M but thanks to a great team and exceptionally strong and active community its network value sits at close to $400M (after the January 2018 bear run).
With the progression into 2017, we can see a drastic change each quarter, Q1 seeing almost no activity in the space.
In April there was a reenergized interest around token sales with June 2017 marking the golden month — there were several token sales a week and sometimes even on the same day.
An increase in competition brought the need for more organized marketing efforts and blockchain startups hire external companies to promote the sales.
Very little to no regulatory oversight was present and legal advice was more on the business side versus compliance. Tokens can expect to be listed on exchanges very shortly after distributions.
Token sales become more ambitious with fundraising goals often exceeding $25M. Many projects were nothing but a concept while raising money. Regardless of the vast increase in quantities of token sales many sold out in minutes, as with Basic Attention Token (BAT). BAT sold more than $1 million in tokens per second when it opened and was sold out in 24 seconds having raised $35 million. Investors were in a frenzy and FOMO ran high. Nobody wanted to miss out on the next big ICO.
An ICO was often considered “unsuccessful” or “poorly organized” if it failed to reach its goal in the first 3 days.
Token allocation structures changed as companies tried to compensate for the new costs associated with the running an ICO. Founder tokens tended to account for 15–25% of all tokens and the formation of highly publicized advisory boards accounted for an average of 5% token allocation as compensation.
An increase in founder token allocation is often justified as incentives for future employees (blockchain developers are scarce), yet the greed factor did kick greatly.
Interestingly, as target amounts went higher, the number of tokens allocated for public sales decreased to 50–70%. Bounty programs start to account for 1–10% of token supply as a cheap alternative to more traditional marketing.
By the end of May 2017, newcomers were pouring in and turning birthday money into ETH and invest in ICOs. VCs were starting to take notice and tried to jump on the wagon before the same wagon ran them over. The ETH network was completely clogged on most days.
Scammers took notice and tried to impersonate admins in every chat, many people fell for the trick and sent funds to fake addresses.
As ICOs required upfront funds, pre-sales were more commonly offering large investors generous bonuses (30–40%).
Almost every ICO returned profits in 3–4 digit numbers in a matter of days after its exchange listing. It’s no longer about picking the right project, it was about being able to get your transaction to post as quickly as possible.
Authorities start to notice cryptocurrencies, mainstream media follows.
And we arrive at Q3, the Fall of 2017, also known as “the fall of ICO’s”. Humans are greedy and we have a hard time drawing the line on how much we want.
It seems as if you have a website and know how to “copy/paste” you are ready to have a token sale. Each day you could find up to 5 ICOs launching. Target goals were anywhere from $50M to $500M. Even your grandparents want in on cryptocurrency. Big bankers criticize Bitcoin on TV while buying the dip they helped create.
Institutional investors were getting in on private and pre-sales with an enormous discount often in the 80% to 100% range. Public sale token allocations averaged 33–25% with founders keeping up to 33% instantly making them multimillionaires, out of thin air.
Bitcoin fork rumors became a reality and BTC starts its run from $2k to $20k and attention along with money switches.
As October 2017 arrived things go north for ICOs and investors alike. Presales sold out very well with hedge funds but main sales had a hard time raising money, offen rendering the large presale bonuses null. Bitcoin was going parabolic as everyone wanted free “fork coins”, this leads to new tokens dumping hard on listing in the range of 20–80% losses. Even solid projects fall victim to this trend reversal.
Many people were angry and governments around the globe step in, many wielding a hammer.
KYC and AML laws are enforced both by ICOs and exchanges. US based investors are often excluded due to the fear of the SEC.
Nothing last forever, this is true with crypto as well, with the small difference that crypto-time runs about 10 times the speed of a regular clock. On November 10th, 2017, Bitcoin Classic fork hangs the gloves and altcoins turn green within minutes.
As we go into the Q4, fundraising records are being shattered. The volume of ICOs increases yet we see some healthy changes.
Investors learned from the lessons of the fall and are asking more questions and researching the projects. We see a decrease in fundraising goals and a return to 10–15% founder tokens allocations. An average of 50–65% of token supplied are now designated for sale.
Bounty programs are seen as ungenuine and commonly dropped with the exception of security and code audits.
Asian markets lead the way with many tokens growing to all time highs. Importantly, private and pre-sales bonuses drop to the early 2017 levels with 20–35% for large investors. SAFT agreements are the norm and non-accredited investors can only participate in the public sales.
With the fundraising goals in the $20M-$30M range it’s not uncommon for the entire sale to close before reaching the main (public) stage.
Where do we go next?
What awaits us in the future? It is hard to tell. The ICO market and its participants have started to mature. Governments around the world acknowledge the potential of blockchain along with cryptocurrencies and for the most part have chosen to regulate it. Even with more pressure from regulators, hundreds of ICOs are scheduled to take place in 2018. Times of staying anonymous if you wish to trade crypto are definitely gone. Get ready to pay your taxes.
The January 2108 bear run might have been a blessing in disguise as it has shaken out many who came to the space out of greed.
We have some incredibly strong and useful projects that have emerged thanks to this new fundraising method yet 95% of all ICOs will fail. There is no way around it. Many signs are pointing to tokenized securities as the future, but we are still a long way from there.
A lot is in the hands of the lawmakers, one can only hope that they will recognize the need to protect consumers does not equal cutting them off from the ability to participate in the market.
I hope that the ICO space does not become one that only bankers, VCs, and other institutional investors from Wall Street can benefit from.
Token structures continue to change. US based, Main Street investors are currently at a competitive disadvantage versus European and Asian counterparts. More and more projects choose to exclude Americans, as the costs and effort of complying with SEC are too great.
Cryptocurrency regulation in the US needs to focus not only on consumer protection. Laws that make it easier for both US based companies and investors to raise and invest money are desperately needed. Too much of the gray area is left. The local market can’t grow if no stimulation is provided.
State and Federal agencies crack down on the obvious violators and scams, and this is a good thing. At the same time, these agencies provide zero to little guidance to the companies trying to run ICOs in a way that complies with the law. This lack of guidance creates an awful limbo when everyone is waiting and no one wants to pull the trigger in fear of being “made an example off.”
Dear Regulators, it’s easy to point the finger after the fact. The trick is to take the hand that is reaching out and help it navigate the path. It is your obligation to chart that path.
Cryptocurrencies might be a worth a tiny fraction of today’s $294T global financial market but if they continue to grow even at 50% the rate of the last 5 years, this will not be the case by 2030.
Depending on the course chosen, the US can be a blockchain powerhouse or be left in the dust.
Many regular, everyday people that I have met shared with me how blockchain and crypto has influenced and changed their lives. Many have improved the standard of their lives and some have even achieved financial freedom. The crypto community needs to be able to adapt to the changes and embrace them. The same goes for the financial sector, governments, and the rest of the population.
Call me a dreamer, but I long for a world in which wealth is not a privilege of the few but all. Imagine what we can achieve as a species when our minds are free of everyday struggles and we can focus on our true potential.
I think that’s what Satoshi Nakamoto meant when he/she (they? :D) created Bitcoin.
This article is for educational purposes only and does not constitute financial advice.
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