It appears as though the once white-hot market for initial coin offerings (ICOs) has finally cooled its heels.
In the past twelve months or so, many teams were able to raise tens or hundreds of millions of dollars on little more than a white paper and a decent website. Now, in more traditional venture investing, newly assembled teams might be able to raise a couple of million dollars in seed funding on a pitch deck and a promise alone. But it’s unlikely anyone would give them $25 million or more.
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In crypto-land, however, it was almost a regular feature. But is that the case more recently? Not really.
The chart below plots the number of ICOs captured by Crunchbase which raised $25 million or more.
The dataset is imperfect. ICOs exist in a fragmented market, and the funding method can often be confused for VC rounds if venture capital investors participate. However, it does point to the general shape of the great ICO Mania of 2017-2018. Alongside the price of bitcoin, ether, and plenty of other blockchain-based assets, interest in the biggest ICOs hit all-time highs, then quickly pulled back.
Let’s put some money behind these numbers. CoinSpeaker’s most recent weekly ICO market analysis lays out the decline in overall ICO dollar volume (for ICOs raising $100,000 or more). Here are the numbers they cite:
- $1.747 billion raised in May 2018.
- $1.499 billion raised in June.
- $926 million raised in July.
- $617 million raised through August 19, 2018.
Why The Pullback?
Just like the traditional venture capital market is correlated with publicly-traded technology companies, the price of blockchain assets waxes and wanes with fluctuations in the price of bitcoin and ethereum. Additionally, since most ICOs are priced in these commodity cryptocurrencies, the amount of USD they’re able to raise can decline with downward price pressure.
The past six months haven’t been kind to the price of bitcoin or ethereum. At the time of writing, bitcoin (BTC) trades at roughly a third of its all-time highs. Ethereum is off by more than 75 percent. The entire cryptocurrency market is valued at around $200 billion (USD) today, compared to just shy of $800 billion in January of this year, according to cryptocurrency aggregator CoinMarketCap.
Add to that an increasing number of reports that companies raising ICOs tend to fail fast. A study conducted by researchers at Boston College, published in June 2018, found that out of a dataset of 2,390 ICOs, just 44 percent of those startups were still active 120 days following the end of their fundraise. Also from June, Reuters covered a study by PwC which found that, out of a dataset of 3,470 ICOs, “only 30 percent of those have closed successfully” or “lost momentum.”
The last factor is a changing regulatory environment around crypto-asset offerings. Despite taking a “do no harm” approach to regulating blockchain tech, that doesn’t mean the SEC’s policy is laissez-faire. Even though U.S. regulators eventually ruled that ethereum is a commodity, after doing so with bitcoin, assets issued on these blockchains are likely securities and are treated as such. As such, companies raising ICOs have to adhere to stricter rules against general solicitation (asking the general public to invest), restricting the investor base to high net worth individuals and institutional investors.
Despite this, there are a few bright spots. Technical infrastructure continues to be a strong segment of the ICO market. In August, Hedera Hashgraph—a company developing distributed ledger technology based on cryptographic hashgraphs, which some say are faster and have higher throughput than blockchains—raised $100 million in an initial coin offering, after raising at least $18 million in venture capital in March.
As far as more application-oriented infrastructure and frameworks go, there’s lately been a lot of interest in funding companies in the gaming sector. CryptoKitties may be the most well-known example of companies using non-fungible tokens (implemented through Ethereum ERC-721 and on other blockchains like Stellar and EOS), which enable the creation of unique assets that can be collected and traded. Several new companies and protocols are emerging in this space, but there haven’t been truly huge ICOs yet here.
As the market for major cryptos continues to stagnate, and crypto-entrepreneurs increasingly turn to traditional venture capital to fund their startups, it will be interesting to see how the ICO market continues to evolve over the remaining months of 2018.