ICO Transformation: The Rise And Fall Of Digital Tokens’ Market

Two years ago the world realized what an ICO was: a method of early project financing through the emission and sale of digital tokens. The thought still misleads some people that it was Vitalik Buterin who created ICO and conducted the very first one. Let’s make it clear: the pioneer was the Mastercoin project, which collected $500,000 in BTC in 2012 (It could have been $18 mln by now). However, this project is no more, and since that, no one was interested in such crowdfunding method up to 2015.

In 2014–2015 Ethereum went “to the moon” and consequently, ICO gained popularity and saw development. SEC, as well as other regulators, didn’t realize what was going on. The volumes were still tiny in comparison to the venture markets: $1–2 bln against $150 bln. And then 2017 came.

ICO 2017: Colossus with the feet of clay

The capitalization of the market grew, as well as the appetites of the projects. Tezos, EOS, Bancor, SONM and many others tried to copy the success of Ethereum. This period even has a household name — “summer 2017.” It was the time when the number of ICO-projects was high, and the percentage of their success was the highest. Everybody measured the speed of the “closing” of the round, not the sums collected. Every day the news from media proclaimed a new bunch of successful X-projects was closing ICO for N millions in a couple of hours. At the same time, the “shovel sellers” came out of nowhere. The rise of the ICO market promoted several industries at once. Crypto lawyers, crypto media, crypto marketers entered the sphere as well as an army of experts and advisors on investments, market-making, trading, etc.

Of course, 90% of these companies and people did not have proper experience and expertise to work in the investment environment. Such a factor is mainly the reason for the failure of almost 90% of the projects. It also boosted the loss of investors’ faith which was growing since the fall of 2017. They faithfully invested in these “Ethereum killers” until the sharp drop of Bitcoin price took place in 2018, and then the entire cryptocurrency cap followed.

The second important factor which killed the ICO phenomenon and shook the market severely was the tokens’ liquidity, or it’s better to say the “lack of liquidity.” For the same money they took from investors, these tokens were listed on the crypto exchanges. Imagine a similar situation with a classic IPO — a company lists a stock on the exchange, but then no one trades it. And that’s what happened to the most ICO projects and tokens. Some managed to give the investors profit before the global market collapsed, but not more than 10% of them.

Wind of change: the regulators enter the game

The late summer of 2017 was marked by the regulators’ appearance, with the U.S. SEC playing the leading role, and Singapore, China, and Korea are in the spotlights as well. With no experience and valuable insights, the vast majority of projects, investors, and exchanges felt into the panic. The position of the SEC made it clear that the tokens of ICO-projects were divided into two classes: security and utility. In fact, there could be more than five different types of tokens, but the SEC didn’t consider any other options. They carefully studied DAO, the notorious case of Vitalik Buterin, meanwhile making the ICO word quite abusive. Thus, since September we already observed TDE, TGE, STO, and others. An interesting format was DAICO, where investors kept control over their investments. However, this method was not widely spread due to the complexity.

Since autumn 2017 up to winter 2018, the time has come for the utility tokens. It was obvious that the traditional models of funding failed: the investors didn’t want to know anything about the “new blockchains.” Everyone was interested in ROI — the return on investment indicator, and the project team. All the advantages of cryptocurrency and blockchain technology were lost and forgotten. The ones who didn’t make it during the “summer 2017”, tried to catch at least something.

A vast number of crypto road shows emerged — these were the international conferences, which promised investors for everyone. ICO projects stopped making money, investors counted the losses, but the time has come for the PR-agencies, investment consultants and conference organizers. The end of 2017 and the beginning of 2018 were the best days for ICO promotions, such as ICO Bench or ICOdrops. Still, the market was falling, and investors’ interest declined as well.

The time to put the rose-colored glasses away

The grip of regulatory shackles, the final drop in liquidity, and the first scandals with ICO-fraudsters & bankrupt projects kept pulling the ICO market down. EOS and Telegram collected about $6 bln, but it did not save the general situation — these projects were unicorns, as venture capitalists used to say. So far neither the first nor the second has shown significant results.

The regulatory initiatives, as well as successful ICO of Telegram (technically, not an ICO, but two venture rounds), set a new trend among those who remained on the market and continued to struggle for results. STO is the trend — the emission of the same digital tokens on the same platforms (in 90% of cases it is ERC-20). The difference is that the token is registered as security. Several jurisdictions, such as the U.S., Switzerland, Liechtenstein, and others already adopted this opportunity. However, the costs for such a procedure are almost on the IPO level — but the funds collected are not worth it. Back in summer 2017, it was common to spend 500,000 dollars to collect $5 mln. The spring of 2018 raised the plank of costs up to $2–2.5 mln.

In the summer of 2018, Bitcoin stuck in a flat with the stagnation and uncertainty ruling the minds on the investment market. Liquidity did not change; the funds, which invested in the ICOs kept counting the losses. There were no new major projects on the horizon. Few exceptions like Quarkchain or Dragonchain barely managed to make a profit. The vast majority of projects simply ran out of money. Naturally, the staff dismissals and budget cuts followed, as well as the first criminal cases. The market entered a self-cleaning stage, and only true technology advocates and professionals remained.

The fall of 2018 presented a record low fall of capitalization, and the market froze. The rumors about the end of the ICO emerged here and there. However, a lot of STO and tokenization projects gained momentum, with the following of new asset class called the stablecoins.

A new chapter in ICO development started: the tokenization of real assets with the advantages of blockchain technology, combined with progressive legal practices. Despite the decrease in the investors’ interest in simple projects, companies that tokenize assets such as real estate, land, and even water sources, show significant results.

What to expect from ICO in 2019?

In the fall of 2018, there were rumors about a so-called “Rothschild ICO” — the IMMO project. The future for the projects of such kind is not clear yet, as the concept of tokenization must be adopted and tested by qualified investors and their “legacy money.” There is also an essential type of “new wave” projects such as investment platform like Roobee, legally allowing investors to participate in an ICO or even an IPO with the use of cryptocurrency. Many people call STO to be the potential trend of 2019, but please remember that this trend strongly depends on the general investment attitude and market capitalization.

Obviously, we won’t see another “summer 2017”, but at the same time, the market would have more stable projects with serious legal attitude and experienced and professional teams. The ICO phenomenon will go on, one way or another. Still, like all new things, it has to go through the market and regulatory prizm.

Image courtesy of BitGid

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