If you’ve been following the crypto market during the last couple of months or reading our articles, and most recently our 2019 prediction for the crypto markets, you might have noticed that Initial Coin Offerings (ICOs) are becoming less, and less popular, with an increasing number of companies failing to hit funding goals.
As a result, fewer companies are announcing token sales, and have again turned to traditional VC funding. Why is this happening to an industry that was growing in size, and admired for its potent innovations? The answer is quite complex; one we will look more carefully into:
Regulatory challenges to launching an ICO
When ICOs first hit the market, they took advantage of an unregulated sector. The cryptosphere was a “free-for-all” environment where anything ranging from market manipulation and fraud happened quite frequently. Speculators gained and lost fortunes when their coins would easily go up 100X, or become worthless. Still, investors loved the thrill.
Funnily, from the start, no country (or government) thought that cryptocurrencies were about to put their banks out of business. Bitcoin was still seen as a rather obscure digital token, with no apparent use case. Many even laughed it off as an outright scam. However, as the market for ICOs began to grow, the sheer amount of money being raised “outside the system” struck fear in the minds of the bureaucrats – as token promoters raised tens of millions, even hundreds of millions of dollars so easily. This was when regulators decided to put their foot to the ground pushing for stricter regulations and oversight. Many countries decided to put an end of these ICOs, and that included China.
Others countries, such as those in the European Union allowed ICOs, BUT companies must adhere to Know Your Customer, and Anti-Money Laundering Regulations (AML/KYC). In the United States, because of their federal political system, regulations vary from state to state. As such, some states demand ICO holders to apply for licences, or to register with market authorities. Overall, the process is not only confusing, but also expensive and time-consuming.
Fast forward to today, regulations are still in the fluid state where it could change at any time. This makes it hard for ICO promoters to launch an ICO, fearing that their funds would be confiscated or subjected to huge amounts of taxation. For example, although Singapore appears to be supportive of the industry, its banks are not too keen. Just imagine being able to setup shop in a supposedly crypto-friendly country, only to find the local bank does not want to do business with you. Either way, it does not help when regulations are still unclear, and navigating the space where companies want to set up as legitimately as possible – takes plenty of time and money.
Scams, failed projects and lack of transparency
Empty promises after empty promises, and unbuilt product without any opportunity to gain any users, as many of these “projects” who held an ICO closed shop barely a year into operation. It is no surprise that close to 90% of the projects which raised money less than a year before have shuttered their operations; their promoters nowhere to be found.
The culprits were always the same. While not many actually had the intention to pull an outright scam, they never meant for the projects to ever achieve the goals that they sold investors on. Instead, ICO proceeds are spent on private jet escapades, splashed on swanky offices, and toys, as founders pop thousand dollar champagnes in the most exclusive clubs around the world; all while “promoting” the project to their community.
For the few projects who were “genuine”, they too created massive mistrust within their community when they refrained from sharing pertinent information regarding projects (often time regarding delays).
Unsatisfactory product releases
The tech industry is no stranger to rushed product releases, only to find it being completely unusable. The ICO industry is the same. The “time” factor is often the determining factor for investors – as they panic over missed dates on roadmaps and product releases, and unreasonable (often immature) need for quick use cases – so their token prices can pump.
The lack of long term planning and relatively “short-term mindset” in investors make it quite improbable to produce products that are useful to the market leading to lack of product adoption – causing many ICO projects to in the end, become only a “speculative” play, with no real customer adoption and progress achieved.
Era of easy money has passed (for now)
So, IF you are thinking of launching your own token, hoping that it might be easy money – you might want to think again. There’s no doubt that investors who survived are more careful with their money than ever before (that, and the sour taste in their mouth). Also, it doesn’t help when the market is in a glut, with Bitcoin seeing a low of almost US$5000 this week alone!
The best advice for now is to probably focus on building, and fitting your product (or service) for mass market adoption. It is our firm belief that in the future, blockchain-based products (and services) would function like any other mass market products. After all, why would anyone want to use a blockchain-based payments solution if it was more inconvenient than its counterpart in the fiat-banking world?
Cover photo by: Triggmine/hackernoon