With the growing glory of digital currencies in the last two-three years, Initial Coin Offerings (ICOs) emerged as a potential tool for cryptocurrency startups to raise funds. ICO is a fundraising method adopted by crypto startups and companies, giving investors their own digital tokens in exchange for BTC/ETH or other legal tenders.
During the time of crypto bloom in 2017, ICOs shot to fame. Investors were investing vast sums of money into digital tokens having some value proposition and promising stellar returns. At one point, ICOs emerged as a more popular way of fundraising and investing, over the traditional venture capital investing. ICOs became more popular as they function in the unregulated market, without letting investors go through the hassles of regulatory jurisdictions.
We at CoinSpeaker have been doing the weekly analysis to give you a glimpse into the changing dynamics of the ICO market. Today, we will look into how things have gone so far in 2018.
ICOs Challenging The Traditional Fundraising Method
As per the Forbes report in July, Initial Coin Offerings (ICOs) seemed to be gaining supremacy challenging the traditional fundraising methods like IPOs and venture capital investments. In Q2 2018 ICOs raised 45% and 31% of the traditional IPO and venture capital markets during Q2 2018, respectively. This was up from 40% and 30% raised during respectively the previous quarter, Q1 2018.
However, according to our latest weekly analysis (Sept 3-9), there has been a vertical fall in the total amount of funds raised in July 2018. Table 1.2 of the report shows that although there is an increase in the number of ICO projects completed in July 2018 over its previous month, the average funds collected during the month have dropped considerably.
Again August 2018 turned out to be a good month with four ICO projects raising over $100 million capital. This includes 134 (TZERO), 117.4 (KitToken), 102 (Dfinity), and 100 (Hedera Hashgraph). These four ICOs managed to pull through the total collection over $1.08 billion for the month. However, the total number of companies completing the ICOs dropped to nearly half. In July 2018, 99 companies reached their desired milestone of fundraising. This figure fell to just 55 companies in August 2018.
The fall is furthermore steep when we see through the first nine days of September. So far, only 12 companies have completed an ICO raising $78 million. Only one company – You42 – has managed to cross $20 million worth collection.
Few Reasons to the Recent Pull Back
The decline in the number of companies completing their ICOs could be because of several reasons. One is that over the last two months, there has been a significant correction in the price of Bitcoin (BTC) and Ethereum (ETH). A majority of the ICO projects consider payments in these two cryptocurrencies in addition to fiat payments. Moreover, to avoid scrutiny from tax authorities, investors also prefer to pay in BTC and ETH.
However, the sharp falling prices in these two tokens have caused several ICO projects miss their target collection. Additionally, a report presented by Boston College researchers in June 2018, shows a drastic failure rate of ICOs. Out of 2,390 ICOs, only 44% ICOs remained active post 120 days from the end of their fundraising period.
A Reuters report from June 2018 shows out of “the 3,470 ICOs announced since the first token offering in 2013, only 30 percent of those have closed successfully.”
Not to forget, the increased regulatory scrutiny is doing more harm to the ICO market. The SEC has said it several times digital tokens issued on blockchain are most likely securities. Hence, they fall under the regulatory jurisdictions. This has restricted the total amount of retail investments flowing in the crypto market. Moreover, new crypto startups are also not much willing to take risks fearing the regulatory scrutiny.
The Road Ahead
There is no doubt to it that Ethereum is still the most preferred blockchain network for ICOs to launch their digital tokens. However, this has caused the Ethereum network to get crowded pretty fast, ultimately resulting in a drop in its performance. One of the major reasons for ETH’s latest price downfall is the higher failure rate of altcoins built on the Ethereum network.
This has caused the ICO mania to slow down. However, there are some ICO projects looking at the Ethereum alternatives like Stellar and EOS. These projects claim to offer better scalability solutions in comparison to the Ethereum network.