ICOs in 2018 – Still Worth It?

Over the last few years, ICOs have taken the world by storm with a record-breaking $13.6 billion raised in 2018 alone.

The untapped resource of eager, non-accredited investors (AKA regular people interested in investing without the $1 million required to get accredited and play in the big leagues) proved to be incredibly lucrative and demonstrated that people all over the world are interested in investing but simply haven’t had access to that world.

That all changed when ICOs came to power – unregulated ICOs dealing in money not officially recognized as legal tender selling promises of returns on products that were often just barely in the concept stage.

It was an incredible time, showcasing the buying power of the public as well as wealthier investors.

It was also, of course, a recipe for disaster.

ICO teams played fast and loose with what little rules there were, and while there were many genuinely great projects that delivered and enriched investors at the same time, the majority of them were failures, and worse, at least 1 in 5 of them were straight up scams with no intention of delivering a product.

That brought the SEC and other government regulators along, kickstarting a wave of investigations trying to determine instances of fraud and selling unlicensed securities, the latter of which something even investors could get in trouble for participating in.

So where does that leave the ICO space now?

ICOs Today

It may surprise you to learn that recent research from Bitmex shows that ICOs have already sold almost as much Ethereum as they raised. Bitmex worked with TokenAnalyst to track the Ethereum balances of ICO projects over time, taking into account the amount of Ethereum raised and the US value of the gains and losses for each project over time due to the fluctuation in the market price of Ethereum.

“We conclude that rather than suffering because of the recent fall in the value of Ethereum, at the macro level, the projects appear to have already sold almost as much Ethereum as they raised (in US$ terms). Of the Ethereum still held by the projects, even at the current c$230 price, projects are still sitting on unrealised gains, rather than losses.”

The company believes that in the ICO space there is $93 million in unrealized gains even now in this bear market that has seen the price of Ethereum plummet 85% from its ATH at the end of 2017, and states that despite appearances, ICOs are technically sitting at a net (unrealized) profit.

Of course, actually realizing that profit would tank the price, right? Here’s what Bitmex has to say about that.

“The 3.8m Ethereum still on the balance sheets of these projects may not have that much of an impact on the Ethereum price, as it represents a reasonably small proportion of the 102 million supply of Ethereum. At the same time, on a macro level, the projects may be feeling reasonably confident rather than needing to panic sell.”

It’s surprising to hear, but in that sense ICOs were actually a roaring success despite the unwanted government attention and the hordes of scammers trying to get in on the action.

Many people certainly made a fortune, and the power of crowdfunding has perhaps never been more strongly demonstrated in human history – quite a legacy for something viewed these days with a measure of disdain.

The Problem With ICOs

Of course, the fact remains that ICOs didn’t work out quite as many people expected them to, a point that is summed up all too well by head analyst at The Block Crypto, Larry Cermack.

70% of tokens are now valued at less than what was raised during the ICO stage – ouch. The bear market has certainly hit crypto hard, but that’s not the only point Larry is making.

SEC classification of many ICO tokens as securities has been huge, and while that axe has yet to fully swing down on the heads of investors and fundraisers, the pressure is being felt by all. Immediately, even the statement that most ICOs are likely selling securities cripples the new fundraising technique in terms of its ability to challenge VC funding.

The SEC has the power to retroactively decide that an ICO was selling securities back in 2016, for example, and then fine and potentially even imprison not only the ICO team but the investors as well. Such a model has doomed many ICO projects which had little to offer other than the promise of high returns, although Bitcoin’s commodity status leaves it safe from harm while Ethereum is also exempt from security status due to the genuine utility of the token beyond representing a share in the success of the Ethereum platform.

Here’s another fun fact from Larry – while 2018 has been a record-breaking year for ICOs, ICO fundraising efforts in Q4 have been absolutely dismal, reaching yearly lows in August and sinking lower still in September.

He notes a trend in the ICO vs VC struggle, with dominance shifting back to VC funding as investors and companies shy away from the ICO model.

“Diar found that while projects are now more reluctant to raise capital through ICOs, they have turned back to VC. In just the three quarters of 2018, blockchain and crypto companies have raised nearly $3.9 billion through traditional VC. On track to raise more than $5 billion.”

That’s 280% more than last year, if anyone was wondering.

The largest VC investor in blockchain and crypto this year was Barry Silbert’s Digital Currency Group which made 115 investments into various projects, more than twice as many as the next on the list which is Blockchain Capital.

ICOs may be on the decline – but an emerging hybrid solution may be able to continue to allow regular people to get in on the securities market without breaking regulations

The New Way To Crowdfund Crypto

Initial Security Offerings, or ISOs, may be the answer to the regulatory (and corresponding fraud) problems with ICOs. A regulated cryto-crowdfunding vehicle that admits it’s selling securities, complies with regulators, and then sells tokenized securities to the masses. This allows investors to buy token shares in securities like shares and bonds without needing to be accredited and without needing to make a huge mininum investment.

This model could still challenge VC fundraising for the everyday investor – so keep an eye out for it!

Crypto is comin!

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