The ICO (Initial Coin Offering) market has been in the spotlight of both the cryptocurrency and blockchain investment communities. If you haven’t heard about ICOs, they represent a new way for startups to raise money. Companies aiming to develop a blockchain-based product or service file for an ICO and sell tokens that are later used within the ecosystem underlying their product. The idea is that the product might become popular, which could drive higher the prices for the tokens.
Though many have been voicing the opinion that ICOs are a bubble that’s about to burst, blockchain-based projects still manage to collect billions of dollars. According to ICORating, in the second quarter, the total amount raised through ICOs was $8.3 billion. This represents 150% sequential growth. In the first six months of the year, ICOs raised $11.7 billion, which is 10 times more than a year earlier. In addition, this amount is more than in 2017 as a whole. This is particularly worth noting because some developments from the last year suggested that the ICO market will take a totally different direction.
In September 2017, China and later South Korea issued bans on ICOs. Earlier this year, it was reported that South Korea could partially lift the ban. However, China is aiming to further crack down on ICOs and cryptocurrency trading. Last year, Gibraltar, British Overseas Territory, announced that it would impose regulations aimed at overseeing blockchain-focused companies in January 2018. In the meantime, the Swiss Financial Market Supervisory Authority launched investigations into some ICOs. Last but not least, the US Securities and Exchange Commission said in July 2017 that some tokens might be considered securities and be subject to regulations.
Despite the ICOs getting in the crosshairs of regulators, the ICO market didn’t slow down but rather, went into hyperspeed. However, the growth in the total value of ICOs is just one side of the token. Behind the surge in ICOs, there is more risk and lower return. This should not scare individuals away from the ICO market, though. ICOs remains an interesting investment vehicle and even potential regulations can be viewed as a positive sign.
Overall, since the beginning of 2018, the ICO market has seen 1239 new projects, including 827 in the second quarter. This has already surpassed the 800 ICOs last year.
The other 16 of the 20 largest ICOs of Q2 raised less than $50 million.
Another five ICOs raised more than $50 million, and the rest raised smaller amounts.
By comparison, in 2017, the largest ICO (Filecoin) raised around $250 million. In this way, while ICOs in 2018 surpass 2017’s in terms of aggregate value, they seem to be becoming smaller.
One interesting shift was noticed among the most popular for ICO industries. In 2017, the most popular industry in terms of the number of projects was blockchain infrastructure. Companies like Audius and De Beer’s are already moving toward incorporating blockchain into their businesses and it’s been rumored that Facebook is looking to work with its own crypto. It was followed closely by financial services and gaming and VR.
In the first quarter of 2018, financial services shot ahead and were trailed by a bigger margin by wallets and exchanges and by an even bigger margin by blockchain infrastructure. Financial services remained the most popular industry in Q2, with 87 projects filing for ICO, followed by investment with more than 50 projects. Blockchain infrastructure moved one spot lower, as gaming and VR overtook it.
Another important thing to point out is that despite ICOs raising more funds, the market’s profitability declined. In 2017, the median return on investment (ROI) for all ICOs was 161%. In the first quarter of 2018 this figure slid to 49% and in the second quarter, it was a negative 55%. This indicates that the larger number of ICOs has a dilution effect on the ICO market as there are far more unsuccessful projects. The larger number of ICOs with a negative return means that potential investors have to do much more research.
Another reason for the lower ROI is the fact that the ICO market has become riskier. In general, most ICOs are done when the project is at the idea stage and the funding is needed for the implementation stage. Between the first and second quarters, the number of ICOs without any development increased by almost 10% to 57.3%. At the same time, the number of projects in alpha and beta stages declined. The good news is that there was an increase in the number of ICOs with fully-developed projects and code. However, this percentage is still meager.
The expanding size of the ICO market has also increased competition. Because there are so many projects that need funding from a fairly limited number of investors, there are more unsuccessful projects. According to ICORating data, 53% of ICOs failed to collect more than $500,000 in Q2. A quarter earlier, only half of ICOs managed to raise more than $100,000
With lower ROI and many projects stagnant at the idea stage, should investors stay away from the ICO market? The short answer is no. The long answer is that investing in an ICO depends on an individual’s risk tolerance and the amount of available capital. In this case, there are two potential scenarios. One is to invest in a variety of ICOs, thus spreading the risk and lowering the average return. The alternative is to spend a lot more time on research and invest in a handful of ICOs, hoping that at least one of them scores big.
Another reason why you should follow the ICO market for interesting opportunities is its size. The bigger size means that the ICO market is more likely to get in the crosshairs of regulators. Of course, we don’t like when the government gets involved and ruins all the fun. However, in the case of ICOs, it may be a good thing. For one, regulations on the cryptocurrency market will immediately deter any potential scammers. In addition, ICOs will have to be more transparent and register with a proper authority. This is going to be a win-win situation for both parties. On one side, investors will have access to more information. On the other side, companies will get access to more investors that are currently staying away from the ICO market.
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