If Bitcoin was the beginning of the blockchain, then the ICO is the first killer app. The emergence of Ethereum as the second most capitalized cryptocurrency is firmly based upon its use as the platform for crowdfunding ICOs. There is much to like in the explosion of ICOs, but there is an equal amount to dislike.
The ICO boom has already brought us more than 1,500 tokens. It is dominated by weak entrants highly unlikely to provide positive returns to investors. Indeed, many are little more than scams.
Decentralization is a driving force in the emergence of blockchain, a critical element in its disruptive nature. One of the most positive elements of the ICO boom is the weakening of the old boys’ clubs and the provision of funding to a broader universe of entrepreneurs. It can only be a good thing if this increases the ability to generate attractive returns for those without access to the venture deals and IPOs usually controlled by the financial elite.
While statistics are hard to come by, it seems that much of the current investment in ICOs come from early adopters. They began mining and investing in cryptocurrency years ago. Many have generated riches during the past few years and they find themselves with their wealth concentrated in Bitcoin and Ethereum. Those who earned millions due to their early understanding of the value of crypto may find that banks are loath to accept their millions. Taxes will become due if they can exit into fiat currency and the banking system. As a result, I believe that many of these successful crypto investors have chosen to diversify by buying into ICOs. This is a critical factor driving the ICO market.
The ICO Market
Firstly, while these investors were undeniably prescient, they may not have the experience analysing early stage companies, management teams or the other factors that drive successful venture investing. This may explain the fundraising success of scams and weak ICOs. It also explains why the market is dominated by ‘follow the leader’ behaviour. This is where broader markets follow a handful of established funds and thought leaders. As the market evolves, we can expect more independent and experienced investors to grow in importance. This is not to discount the understanding many current ICO investors have of the blockchain. It is to emphasise that many of today’s investors lack the other qualities of successful VC investors.
Secondly, many of these investors have been led to believe that the success of traditional venture capital funds result from making many investments and having only a handful succeed. This includes one or two that succeed magnificently. I believe that these investors often discount the wisdom, discipline and knowledge VCs bring to their investment process and to each of the companies and teams in their portfolios.
Finally, this may mean that there is little fiat money going into the ICO market. Instead, we have investment generated from the massive increase in value of crypto assets. If true, we should expect continued increases in ICO funding. The first quarter of this year realised more funding of ICOs than the entire of 2017.
If ICOs are being funded in crypto and converting their operating budgets into fiat to execute their business plans, this could be having an impact on valuations by creating sustained demand from crypto into fiat.
Daniel Wolfe is CEO of Tradingene (www.tradingene.io) the first marketplace for trading algorithms
Tradingene’s own ICO commences on 16 May 2018