Are ICOs Shrinking?
One of the trademarks of the cryptocurrency era is the initial coin offering, or ICO, a new and controversial form of fundraising. An ICO, most simply, is when a company raises money by issuing their own crypto token. ICOs raised more than US $6 billion in 2017, and blockchain startup ICOs raised five times the amount as equity financing. This visualization by Elementus illustrates the boom in ICO activity between 2014 to 2017.
In 2018, however, as the accompanying chart shows, ICO activity appears to have cooled down. According to data by icodata.io, visualized by Longhash, funding from ICOs dropped from almost US $1.3 billion to US $561 million dollars from February to April, before rebounding to $868 million in May. The ICOs in this chart are grouped by their start date.
What explains this drop? One simple answer is that the price of Ether was relatively low in April, and many startups that do ICOs receive Ether in return for their tokens. “The general drop in the cryptocurrency market cap has likely been one of the biggest drivers of the ICO slowdown as that has affected the realized -- and unrealized -- market returns of both existing coins and potential ICOs,” explains Zennon Kapron, founder of Kapronasia, a financial services consulting firm.
Some famous fundraising efforts are not featured on this chart, such as Telegram’s. The messaging company raised $1.7 billion from private investors before deciding to ditch its plans to have a public ICO. Telegram may have simply decided that a token crowdsale wasn’t worth the trouble -- and it’s not alone. “Many ICOs are also skipping doing a public ICO by either relying on pre-sale or private sales to raise funding,” Kapron explains. “This removes a lot of the potential headaches ICOs need to deal with including [non-accredited] investors and public ICO mechanics.”
Potential headaches have been increasing as regulators all over the world scramble to rein in ICO activity. There are arguments for why ICOs can be a powerful and democratic form of fundraising, and are in fact the beating heart of the blockchain economy. But ICOs are also ridden with scams. A Wall Street Journal review of nearly 1,500 coin offerings found “rampant plagiarism, identity theft and promises of improbable returns.” The United States Securities and Exchange Commission even created its own fake ICO just to demonstrate how easy it is to dupe investors.
Late last year, China banned ICOs entirely, partly due to concern that scammers would rob ordinary citizens of their savings. The United States has also signaled its desire to clamp down on the ICO craze. In late February of this year, the New York Times reported that the SEC had sent subpoenas to dozens of of people and companies affiliated with ICOs. Likewise, Singapore, which has developed a reputation as a safe haven for ICOs, has tightened regulations around ICOs and tokens, especially those that act like securities.
Kapron notes that this regulatory activity has had a chilling effect on ICOs. “2018 marked the start of greater regulatory scrutiny of ICOs with regulators around the globe looking at how to regulate and control,” he said. “With several ICO founders currently facing legal issues and potential jail-time, we’ve seen potential ICOs take a step back to ensure that they are in compliance with regulations -- at least as much as possible given the few regulations that are published.”
It’s worth noting that the accompanying chart does not provide a complete picture of fundraising activity. Longhash's visualization does not include ICOs that raised less than US $1 million. Elementus co-founder Max Galka also notes that this data does not include sales from Huobi, Bankera, tZero, Fusion and Andra, all of which raised over US $100 million in February or March. The chart also doesn’t include recent funding by EOS. “I’ve noticed a continual lag on most ICO listing sites,” Galka says. “Recent months are usually underreported.”
Galka adds that if the overall trend in the accompanying chart is at is appears, and “there really was such a drop, it’s logical to think regulation is the cause.”