Go nowhere ICOs testing investor confidence

On January 1, 2017, the price of bitcoin exceeded the $1,000 mark for the first time in three years and continued to rally thereafter. This brought media attention back to bitcoin and also raised awareness about altcoins (Ether, Litecoin, and Ripple for example) as well as new coins that were being issued via token sales.

Driven by the belief that these newly issued tokens might replicate bitcoin’s price evolution, the ICO market quickly captured investor attention, resulting in several blockchain ICO projects raising tens of millions. As the market boomed, however, there also came a wave of sub-par ICOs that still managed to raise substantial funds — as well as outright scams. Some leading bitcoin community figures even claimed that ICOs are only a way for developers to get rich while many others have voiced their concerns about the valuation of projects that do not even have a working minimum viable product during their fundraising stage.

As new record numbers of funds were raised in Q2/2017 and startup valuations were mimicking those of the DotCom bubble, regulators started to take notice. While most have simply issued guidance statements and alerted stakeholders to the potential application of securities laws to ICOs, China and South Korea took it a step further and banned ICOs outright. These bans dampened the Asian ICO market in early September as two major investor countries were now prohibited from participating.

Problems arise in major ICOs

Action by regulators hasn’t been the only thing cooling enthusiasm for ICOs, though, as problems have also surfaced with several multi-million dollar ICO projects after their token sales had completed.

The Bancor Network — one of the largest ICOs of 2017 — received negative press when Cornell professor and outspoken blockchain thought leader Emin Gun Sirer stated in a blog post that investors who took part in the ICO invested in untested code and highlighted several other issues with the Bancor project. Prominent bitcoin evangelist Andreas Antonopoulos and Augur co-founder Joey Krug also voiced their concerns over the project’s viability. The price of Bancor tokens (BNT) is currently trading around 50 percent below its issue price.

IOTA was forced to announce in September that there was a vulnerability in its cryptography after it was discovered by MIT researchers. While the vulnerability has since been patched and no exploit of the vulnerability took place, this revelation did not bode well for the reputation of a promising blockchain project with a market capitalization of over $1 billion.

Most recently, it has come to light that the leadership of Tezos, a blockchain project that raised over $232 million, has entered into a legal dispute with the head of its Swiss foundation that holds all of the funds that were raised during its crowdsale.

According to Reuters, Tezos founders, Arthur and Kathleen Breitman, “sent a 46-page letter on Sunday to the two other members of the foundation’s three-person board, calling for Johann Gevers’ prompt removal and seeking to give the couple a “substantial role” in a new structure that would limit the foundation’s responsibilities. The document accuses Gevers of “self-dealing, self-promotion and conflicts of interest.”

Gevers, however, told Reuters that he does not plan on stepping down and said that the Breitmans are trying to gain control of the foundation through character assassination. Gevers went on to tell Reuters that the foundation has begun selling the cryptocurrency the Tezos project raised during its ICO and plans to invest the proceeds into a diversified portfolio. These funds will then be used to operate the foundation and to ensure the future development of Tezos and its technology.

Until this dispute is resolved the Tezos platform will not be able to launch as the Breitmans are not able to access funds from the ICO to continue the development of the project. Needless to say, the price of Tezzies (XTZ) has dropped precipitously in pre-launch trading — down around 50 percent since the Reuters story broke. The cases of Bancor, IOTA, and Tezos act as reminders of how risky investing in initial coin offerings can be as there is little insight into most project’s work and stage of development.

Only 10 percent of ICO projects have built a product

More worryingly for the current state of the ICO market is a recent analysis by Token Report, which found that only ten percent of projects that have held an initial coin offering to fund themselves have actually developed a functional product.

 According to Bloomberg, only 20 of the 226 ICO tokens analyzed by Token Report are actually being used in the projects’ networks while others can only be traded on exchanges for speculative reasons. Token Report CEO Galen Moore stated TenX, Storj, and Augur as examples of the few startups that have actually delivered a product where its tokens are being used.  

The reality of the ICO market is that in most cases investors are simply betting on the startup team’s ability to turn their proposed ideas into reality. As it turns out, only a few have actually been able to do that.

Many high-profile ICO tokens are underperforming

While startups tend to measure ICO success by how much money they have raised, investors, on the other hand, care more about how well the newly issued token they bought performs in the secondary market — and for many the results so far have been disappointing.

In June, Bancor raised a staggering $153 million and went down in history as one of the biggest ICOs to date. Great for its founders, certainly, but from an investor perspective the value of its cryptocurrency has dropped by around 50 percent since its token sale, making it one of the worst performing ICO tokens in the market.

EOS was another record-breaking ICO that has issued a token that has since underperformed the market and is trading below its issue price. EOS managed to raise $185 million for its decentralized blockchain network and, in an unconventional move, is actually still running its token sale until 2018. However, its token has already launched on exchanges where it is currently trading lower than its original issue price. Other ICO tokens that are trading below their issue prices include Wagerr (WGR), Tierion (TNT), and CoFound.it (CFI).  

Over 400 ICOs have been conducted since this new form of funding was first introduced in 2013. Today, anyone can launch an initial coin offering to fund their project and they don’t even require any technical knowledge to do so as there are now several ICO-as-a-Service platforms, and blockchain platforms such as Waves allow easy token creation for anyone.

Hence, we are now seeing dozens of ICOs hitting the market every week and for many, including the blockchain and a digital token into their project makes little to no sense. Too many startups and developers are simply jumping on the ICO bandwagon because they smell the money, a scenario that regrettably is taking funding away from many truly innovative value-adding blockchain projects.

However, with increased regulatory restrictions and scrutiny on token sales, and growing investor aversion to the bubble-like state of the ICO market, it seems that the heyday of easy money through token sales is over. New projects are finding it increasingly difficult to hit their funding targets while investors are seeing many of their tokens underperform comparative to bitcoin. 

In the future, the ICO market will probably be more tightly restrained by a regulatory framework. Although this could prevent many smaller startups from opting for this type of funding, it will at the same time make the ICO market a more investor-friendly place as regulators keep a closer eye on issuers.

Before that happens, though, for investors there will likely be a move back to quality as they deal with the reality that many of the bright ideas they invested in have never come to fruition — and the bulk of future investor funds will be channeled into primarily high-quality projects that actually make sense.