The Daily Edge is authored by Ivan Delgado, 10y Forex Trader veteran & Market Insights Commentator at Global Prime. Feel free to follow Ivan on Twitter & Youtube weekly show. You can also subscribe to the mailing list to receive Ivan’s Daily wrap. The purpose of this content is to provide an assessment of the conditions, taking an in-depth look of market dynamics – fundamentals and technicals – determine daily biases and assist one’s trading decisions.
What does the term ICO refer to?
The word ICO is an acronym for Initial Coin Offering, a popular term back in 2017, although the first ICO dates back to mid 2013. It was spear-headed by Mastercoin the first crypto-based project to hold the first token sale, followed by an increasing number of ICO launches in 2014, including the sizzling hot success of Ethereum at the time.
The frenetic background history of ICOs
The ICOs became widely popular during the irrationally exuberant crypto mania back in 2017. It was a time when regulations were exceedingly lax, which led to an absolute tsunami of crypto startups launching ICOs in order to crowdfund projects. Some very legit and honorable based on the technology and problems aimed to solve, even if the general traits included many projects with very dubious intent.
It goes without saying that when you combine the lack of strict or high standard regulations that would prevent these crypto companies from seeking investment directly from the public or other intermediaries unless thoroughly scrutinized, alongside the extraordinary high valuation levels in the crypto market, completely out of whack based on technology or public adoption at the time, it became the Wild West. Many horror stories have been written about the frauds or scams that occurred back in those days.
Differences between ICO and IPO
The term ICO, in a way, is a borrowed word from the stock market. Whenever a company aims to go public in a specific stock exchange, it must go through a process called IPO (Initial Price Offering). In the case of an ICO, since the ecosystem it applies to falls under the domain of cryptocurrency-based projects, the terms has a subtle variance from IPO to ICO, in order to indicate that what will be exchanged is legal tender for coins vs legal tender for shares.
An ICO serves a similar purpose as a typical IPO launched by a stock market company. Both are forms of crowdfunding a specific project, although in the case of an ICO, a specific quantity of cryptocurrencies, also referred to as ‘tokens’ or ‘coins’ are sold to investors in exchange for legal tender. However, in an ICO, unlike an IPO, the crypto project is more heavily reliant upon the funding raised to kickstart the project, as it acts in the vast majority of times as the unique source of capital for the startup.
How many ICO have been launched?
The year 2017 became the genesis of the ICO mass-scale phenomenon, even if the reality is that the frenziest expansion in crowdfunding via ICOs would be seen the year after in 2018. In fact, during 2018, an estimate of around 2,500 Initial Coin Offerings took place, which represents about 3.5 times more than 2017’s total. About 40% of ICOs hit their funding targets.
As time goes by, a clear trend is the maturity of the funding cycle, with the average ICO duration now increasing to about 100 days, which is almost three times as long as back in late 2017, when the window would barely last one month. This appears to be a logical step as ICOs require extra time to raise their hard and soft funding targets amid the loss of interest.
While there has been a collapse in the total number of ICO processes, there appears to be a negative correlation with the average success rate, in other words, as less ICOs launch, more projects are able to complete funding targets, a result of the maturity in the industry and more professionalism abounding.
We’ve evolved from the Wild West into a more like-minded and highly educated ICO industry.
How much ICOs raised?
The explosion in interest towards ICOs back in 2017 leaves no doubt for ambiguity as the capital raised was almost 40 times as much as back in 2016. Startups and projects pertaining to the crypto ecosystem raised a total of $5.6 billion through these so-called initial coin offerings (ICOs), according to a report by Venture capital fund Fabric Ventures and cryptocurrency data provider TokenData in their “State of the Token Market” report.
Granted, even if the plummeting of crypto prices began soon after 2018 got underway, it took months of pain and obliviousness by the general public before there was a mass recognition that the once hot Initial coin offerings (ICOs) craze was quickly entering a period of decay.
Proof of the exuberance that had been present is the following shocking stats:
In only took the first three months of 2018 to surpass the amount of capital raised in 2017, as documented by the crypto news giant CoinDesk. Over $6.3 billion worth of ICO-related funding had been generated in the first quarter. The year ended with $7.8 billion, according to data provided by the website icodata.io
after a total of 1,253 recorded ICOs raised funds.
From here, the trend started to peter out, with the waing by the US Securities Exchange Commission about upcoming crackdowns in the house of cards built around ICOs.
The SEC agency’s chairman, Jay Clayton, set the ball rolling by telling a Senate hearing in Feb 2018 that, “every ICO I’ve seen is a security.”
While it has taken some time for the market to recognize the inherited risks that an ICO carries amid the hardened stance by regulators, the concurrence of low crypto valuations and the vanishment of retail investors has led to a gradual and slow decay in the funding of ICOs.
There is definitely still activity in the ICO space, but the offerings are way down, even if some companies are still resorting to crowdfunding via the SEC back door.
As reported by MarketWatch, “this method allows companies to make an application for what’s referred to as a SEC’s Form D exempt offering process, which still allows access to accredited investors with no pre-review by the Securities and Exchange Commission.”
In 2019, the amount raised by ICOs plummeted from the exuberant lofty levels in the billions to just above $350 million as of today, Dec 9th, 2019.
How many ICOs have failed up to date?
With thousands of ICO projects launched with a combined total amount of capital raised in the tune of $14 billion to date, it is safe to say that the vast majority have either failed or are in an unstoppable downward spiral towards a slow death.
In fact, according to a study carried out by a small team at Boston College in Massachusetts, most of the ICOs show a lifespan of about four months from their token sales before failing. Less than 50% of cryptocurrency projects remain actively engaged beyond that 4th month threshold, with the core barometer used to gauge this patte through the social footprint via Twitter.
Hugo Benedetti and Leonard Kostovetsky, from the Boston College Team, stated:
“Breaking it down by category, 83% of the 694 ICOs that don’t report capital and don’t list on an exchange are inactive after 120 days. For the 420 ICOs that raise some capital but don’t list, this figure falls to 52%, and for the 440 ICOs that list on an exchange, only 16% are inactive in the fifth month.”
In fact, by mid 2019, over 800 cryptocurrency projects are thought to be buried, but more shockingly, roughly 50% of all ICOs in 2017 and 2018 failed to raise a single cent.
Why is it that ICOs fail?
As part of the make-up of a successful ICO that sees the price sustained if not increasing overtime, one must take into consideration #1 cryptoeconomics, #2 Utility, #3 Security.
The first term, crypto economics can be broken down into “cryptography” and “economics”. It is this latter term that tends to be overlooked as a token requires enough demand to offset the upcoming inflation. Unless the future demand outnumbers the amount of inflation in the long run, the value is doomed to collapse. Those projects that overlook this essential economic theory gain the license to be dubbed Ponzi Schemes.
Another vital piece of the puzzle to understand why the majority of ICOs have so far failed has to do with the utility component, in other words, how dependable is the ecosystem to the usage of the token. The website blockgeeks
puts it best, when noting that “If you are an ICO developer, then ask yourself this question: If you take away your token does your business fall apart? If the answer is no, then you don’t need a token.”
Last but not least, unless an ICO dedicates the time and resources to ring-fence its token sales process, they easily become the pray of bad online actors or ‘hackers’, who are out there for a ‘jackpot’. It is thought that about $400 million worth of funds (10% of the total amount raised in ICOs) were stolen from ICOs.
Why most ICOs are launched via Ethereum?
The tsunami of ICOs seen since 2017 wouldn’t have been possible without a blockchain ecosystem that made the whole process as user friendly as possible, relatively speaking.
Ethereum made this possible as it allowed any ICO to relatively easily collect cryptocurrency from investors in exchange for the distribution of the ICO’s native tokens to the contributors.
To date, billions of dollars have been raised using the Ethereum blockchain as the absolute dominant network in the space, allowing a clever route that bypasses the conventional way of seeking out seed funding from accredited investors.
First of all, there are clear limitations to launch an ICO in the Bitcoin blockchain due to the programming language, making the calculation and distribution of tokens on top of a wallet far from user friendly, not to mention that Bitcoin’s transaction time is far from ideal as it takes 10m to mine the next block. Other issues such as not supporting programming loops or not being a turing-complete scripting system also played a key role to strip out Bitcoin as an option.
Once we throw into the mix that the very nature of the capabilities in the Ethereum blockchain were very attractive for ICOs, it became a no-brainer.
Ethereum is able to execute, via smart contracts, an automatic calculation of the amount of funds raised, including the verification and confirmation of a particular transactions, as well as the distribution of new tokens once the crowdsale is over.
Ethereum also incorporates the turing-complete, which creates an incentive for people to engage in the network via its CPU power in order to process instructions into a program code. By paying the cost of “gas”, it ring fences the risk of infinite loops and DOS attacks against ICOs.
Lastly, the transaction time of each block is much faster when compared to Bitcoin. This is due to Ethereum’s Greedy Heaviest Observed Subtree (GHOST) protocol. This is music to the ears of ICOs that must deal with thousands of transactions that must be verified and token distributed as part of the crowdsale process.
How much does an ICO cost?
First things first. If you want to launch an ICO, you must acquire a registration certificate under the regulatory body that falls in your constituency.
Some of the most popular and friendly destinations to set up shop include Singapore, Gibraltar, Malta or Switzerland due to the laxer laws around crypto currencies. Many cryptos projects are taking a unique route of nonprofits status to avoid being labeled a ‘security’.
If you are an individual investor, the cost of your ICO purchase needs to account for two main factors, including the number of tokens you’d like to acquire based on the budget available and the price per token.
Alteatively, as a crypto-oriented project interested in launching an ICO, there is a plethora of elements to bare in mind from development to legal and compliance, cybersecurity, marketing and much more.
Make no mistake, if a successful ICO launch is what’s intended, a generous budget is necessary to guarantee that an ICO ticks all the boxes, from safety, compliant, technology, marketing, etc.
As a rule of thumb, it is thought that the concept development can cost in the range of $10k to $20k. The technology development tends to duplicate this cost to ensure all the technical details are taken care of.
However, that’s just the tip of the iceberg, you’ll require a much bigger budget to make the ICO project compliant across multiple jurisdictions. It is estimated that the cost can vary from 100–200k.
There are more components to be taken into account such as the cost of developing the token sale system, the handling of all the cybersecurity-related activities or Marketing and PR to attract enough attention, which can easily amount to an additional $100k to $150k to go full circle in all the key aspects.
It is, therefore, safe to say that for a well-run and compliant ICO, an estimated total cost between $300k and $500k is the budget expected to have available to up the odds of success.
For more detailed information, refer to the article “ICO Budgets: How much does it really cost to do an Initial Coin Offering?” written by Grace Zhai, an entrepreneur in the crypto space.
How much does it cost to list an ICO in an exchange?
Once the ICO has raised the desired funds through the exchange of its native tokens/coins vs legal tender , the next logical step is to gain broader market access so that investors and short-term speculators can have a choice to buy and sell at will the asset class. However, here is the kicker, listing an ICO token in some of the most liquid exchanges such as Binance, Kraen, Bitfinex, Bitstamp or Coinbase can be quite costly.
According to the website Autonomous Next, listing a crypto token on an exchange comes at a cost that may vary from “$1 million for a reasonably regarded token to $3 million for an opportunity to get quick liquidity.”
In addition to the fees paid to exchanges, additional expenses to account for as part of the ICO listing process include the costs pertaining to advisors as a key actor that acts as a liaison to build connections within the industry, work on a strategy to receive positive press and the roadmap of the ICO process. Other costs associated with social media influencers and marketing should also be included.
Final thoughts on ICOs
The ICO phenomenon has shaken the grounds of the crypto industry in an unimaginable way, even if we must lamentably recognize the advantages it’s had as well as the drawbacks.
On one hand, it has promoted the awareness of genuinely ground-breaking blockchain-based projects. These companies found an opportunity to gain access to the funds required by bypassing strict regulations in what became the real life wet dream version of any libertarian with hopes of a democratization of finances.
On the other hand, the easy access by crypto projects via ICOs to a whole new crowd of investors in order to raise millions within seconds led to the proliferation of all sorts of scams and unethical behaviours. It really was a matter of time before we transitioned from the Wild Wild West to a more professional scene.
As this decade ends and the dawn of a new one looms near, heaps of lessons have been leat in the ICO domain to hopefully transition to new models where the risks for investors are reduced.