The fledgling sectors, blockchain, and digital assets have had a disruptive influence on incumbent financial practices, as well as altered the manner in which members of the general public perceive, exchange, and interact with value. The growing tide of interest in digital currencies year on year offered the average individual the ability to invest in promising ventures directly through a fundraising activity known as an Initial Coin Offering (ICO).
The ICO crowdfunding model was developed as a means for organizations in the blockchain or digital assets spheres to raise funds for their individual Distributed Ledger Technology-based projects without having to adhere to regulatory processes or give up a large portion of the equity to Venture Capitalists. Initial Coin Offerings are structured very much like an IPO, with the exception of a few key points.
What Is An ICO?
The ICO, otherwise known as a Token Generation Event (TGE), came about with the introduction of the Ethereum network, which leveraged the growing popularity of blockchain and offered an innovative crowdfunding model, intended to be an alternative to the more paperwork intensive forms of business financing.
A company engaging in an Initial Coin Offering will issue a document known as a white paper on their website or popular coding forums like GitHub, detailing their product, it’s functionality, what problems it solves, as well as the organization’s plan of action, projected timelines, among an array of relevant information. Some projects, even go as far as including sections of the code they intend to use, opening it to public scrutiny.
During the ICO, usually running for a predetermined amount of time, the company issues a cryptographic token to participants contributing funds to the project. This is unlike an IPO, where the company issues a stock which represents a stake in the company and entitles the holder to profits generated from the firm’s commercial activity. The token one receives in an ICO is essentially the key to accessing and utilizing the product for which it was issued and does not denote a degree of ownership of the issuing company. The token holder’s profit relies solely on the prospect of the project gaining a substantial user base and demand in said token rising.
In a conversation with CNBC, Bancor co-founder, Galia Benartzi explained why they opted to go the ICO route; “We decided to launch a TGE because we had a design for a promising token — BNT, which could connect many tokens into a network — the Bancor Network — and make them instantly interchangeable, without needing to match buyers and sellers, without relying on volume or market makers, and without fees or barriers to listing.”
“During the TGE, more than 10,000 users contributed to the project by purchasing BNT. These 10,000 BNT holders instantly seeded the network in a way that no traditional launch would have been able to do. This momentum is essential for a network’s growth and a TGE allowed us to create alignment with early adopters in a way that increases the network’s chance of success.” She went on to say of the effectiveness of the ICO funding model.
2017 was the year that ICO funding model’s popularity reached a fever pitch, with about a thousand ICO’s concluding having collectively raised 3.5 times more capital than the venture capital route. Amounting to over $6 billion raised during that year. Venture capital firms had been investing in blockchain technology since 2013, spurred by Bitcoin being a proven use case for blockchain.
2017 saw the speculation in digital assets run rampant and the resulting cryptocurrency boom may have buoyed the ICO to a record year. However, an estimated 80% of the funds raised during that calendar year went to fraudulent projects.
The ICO model opened up the investment playing field to the average person but relied too heavily on the security of blockchain yet lacked sufficient governance structures to protect the unsophisticated investor, whose inclusion it was designed for. The feverish enthusiasm centered around the ICO market attracted bad actors who hoofed it with the funds of unsuspecting investors. Taking with them, the trust the public had in the funding model.
The fates of both the digital assets market and the ICO market appear to be intertwined as the fall in crypto prices coincided with a sharp drop in the funds raised by ICO activity the following year. According to a report by Autonomous Next, the funding raised through Initial Coin Offerings dropped by a dramatic 90% in 2018 compared to the previous year.
As the cryptocurrency bear market wore on and myriad digital assets register double-digit losses in value, the Initial Coin Offerings sphere took in fewer funds, year on year. The ICO raised nearly $3 billion in January of 2018 and performed more sluggishly as the year progressed, to raising a mere $300 million in September of the same year.
Owing to various authorities globally, beginning to draw up regulatory measures for the nascent industry, an opportunity for speculators to manipulated digital assets markets have declined. The speculator exodus bled the market of investor confidence, in addition to valuable liquidity. This, however, is viewed as an opportunity to innovate the blockchain industry.
“The hype is gone. The fervor is gone. But I think that’s a good thing.” States Alexis Ohanian, co-founder of the social network, Reddit. Now that the speculators have exited the market, the remaining participants “[Are] actually builders. They’re actually building the infrastructure that it’s going to take to really make this happen,” proposes Ohanian.
The Future Of The ICO
A good number of governments have come to recognize cryptocurrencies as either valid mediums of exchange or legally protectable investments. As such, regulators have moved to protect investors by regulating the digital assets and ICO market. This will likely usher in a trend of legally compliant ICO’s.
The ICO is undergoing a transition from it’s Wild West styled free-for-all days to a more mature market, offering real value to its investors.