Rehashed #31 - Initial Coin Offerings (ICOs) Running out of Steam

Demand for tokens waning

Gaining initial momentum mid-2017, token sales have generated over (USD) $21 billion in raised capital thus far. Recently, however, demand for ICOs has significantly dropped off, with the month of September generating $200m in capital raised- comparable to May 2017 levels and down over 90% from the monthly high in February of this year.

Average deal size remains relatively high

Although demand for token sales appears to be dwindling, average deal size remains high. Extraordinarily large raises are still being completed; projects such as TaTaTu, completed a (USD) $575 million token sale in August and many projects continue to raise over $50 million. Tokens sales conducted throughout 2018 are angling towards a trend of fewer and fatter as investors continue to chase deals that promise high returns.

When compared to traditional fundraising channels, average deal size still seems absurdly large. Average deal size for ICOs to-date comes in at (USD) $24 million, staggeringly larger than the average seed deal size in 2017 of (USD) $600,000 and even outsizing Series A average investment size of (USD) $10 million. As ICOs should be comparable to early stage seed companies (often just an idea with little product-market buildout), we need to see funding models where projects are implementing modest hard caps and capitalizing at much lower valuations.

Bigger isn't always better

The data also supports the idea that bigger, is in fact, not better. Primitive VC recently surveyed major ICOs and found that large raises have not equated to high returns.

Source: Primitive VC

This supports the notion that large deal sizes can cause a misalignment of incentives. Founding teams are suddenly sitting on a giant war chest of capital- not to mention, the significant chunk of token supply they are likely to have retained. Where is the motivation to build and execute on the product when the money is already in hand? As any successful start-up is likely to preach; in the beginning, being lean is important.

Regulatory pressures playing large role

Is the day of the ICO nearing its end or just reflective of the wider bear market? After all, lack of demand is increasingly obvious in the liquid markets where many exchanges have started the delisting process for scores of tokens that have poor liquidity and weak trading volumes.

Although a lack of investor interest is certainly driving the drop in token sale funding, regulatory pressures also appear to be a large contributor. Increased regulatory scrutiny is already pushing existing projects to rethink their token sale strategy. From “equitizying” tokens to closing down and redistributing funds, we are seeing a swath of post-sale utility tokens employing all sorts of creative methods to attempt to become compliant with existing securities laws.

As the regulatory landscape tightens, many new projects have turned to the traditional venture capital world for initial funding. Unfortunately, this whole process is starting to look similar to the equities landscape where a select group of investors get access to the best deals, leaving the wider public with late-stage entry points at much higher valuations (IPOs). So much for democratising the capital raising process. Some service providers have emerged that aim to provide equal investor opportunity to compliant token sales. However it’s still early days; all eyes will be watching the efficacy of platforms, such as Republic and CoinList, in running compliant and accessible token sales.

Given the ICO model’s characteristics of misaligned incentives and increasingly less than savoury returns, the decrease in ICO funding may be for the better. Security tokens may soon swoop in to take their place. Alongside their application to existent real-world assets, many believe that compliant security tokens will emerge as the preferred funding mechanism. I’m not convinced that this will be the optimal solution but perhaps it will encourage more modest valuations and accountability for crypto projects. Regardless, the token funding model certainly needs innovation and will continue to be an important development within the crypto ecosystem.

 

In the News

China merchants can now legally accept crypto as a payment method.

Bakkt launch is imminent; bitcoin futures are scheduled to begin trading on December 12, 2018. This is assuming the rumours are true and Bakkt gets regulatory approval in the coming weeks.

Square announced that they are open-sourcing their cold-storage wallet framework.

Digital Asset Research held their Q3 Webinar (can be replayed here) which provides good insights and upcoming trends in the space.

Another spot-on Dilbert comic:

 

Upcoming Dates

29 December - Deadline for VanEck SolidX ETF (can be extended to final deadline of Feb 27, 2019)

 

As always, thanks for joining - see you next week for Rehashed.

Freddie Archibald

 

View previous issue: Rehashed #30 - Revolutionary Technologies: Hindsight is 20/20

View next issue: Rehashed #32 - Bitcoin’s Price Correction Persists


About the author:

Capital markets to crypto convert. From Christchurch →  Boston → New York, Freddie became intrigued by the potential of the digital asset economy after plucking a book on Bitcoin off a New York library bookshelf in 2016. Her parents are thrilled that she is chasing magic money on the internet.

 

Disclaimer:  The above references an opinion and is for informational purposes only. The opinions expressed by the author do not represent the opinion of BitPrime.

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