Let’s say you have a great product/business idea right now, but you’re kind of broke. Your great idea needs some fundraising and/or investment to thrive, but… who do you ask for it? The bank? Too much red tape (and maybe you already have an unpaid credit). A crowdfunding platform? Perhaps that’ll do… if you do enough marketing and pay the fees. That dubious lender you found on Facebook? It doesn’t sound too good, indeed.
Then, what? Is your nascent startup doomed to be just in your head forever? Not if the cryptocurrency world can do something about it. This is the main reason the Initial Coin Offerings (ICOs), Token Sales, or Crowdsales were born.
So, what is an ICO?
As the (second) name may suggest, the ICOs are a mechanism of fundraising, in which a company, organization, team, or individual (anyone, really) offers to the public an established quantity of new blockchain-based tokens for sale in a given period.
With the funds raised through this method, the author/s of the project that is offering the ICO can complete the development of their product or idea. In exchange, the investors gain the unique tokens created for the ICO, which can be used later inside the future platform/product or can behave (sort of) as a stock: if the project is successfully completed, the tokens will raise their initial value.
To sum it up: is something very similar to the crowdfunding, but especially for startups, involving cryptocurrencies and without barely any regulation or conditions worldwide. The only thing the ICO’s devs should pay is the (usually very low) fees per transaction or smart contract. The latter would be necessary to lock the funds and distribute them among the investors in a fairer, transparent way.
Despite that, the team behind the project would be still in control of the funds in most cases… and that’s the problem in most cases. Because, sadly, the ICOs are surrounded by bad ideas, mediocre platforms, aggressive marketing, and, in worst cases, frauds and exit scams. They’re not regulated and this isn’t only an advantage, after all.
The boom: 2017-2018 crazy gold rush
The first ICO was held in 2013 by Mastercoin (now Omni), a platform based on Bitcoin that enables the creation of new cryptocurrencies and assets. To date isn’t very known and its success could be debatable. Although, just a year after that, would come the Ethereum ICO (yes, Ethereum was born from there).
In a few years, that one would be the favorite blockchain to launch ICOs, but, by then, the initial project received around 18M dollars in BTC for the sale of Ethers (ETH), their native token. The (lucky) investors bought them at 0.31 USD per unit, while, to date, the price is almost 400 USD per unit. And, of course, they can use the ETH inside the Ethereum blockchain to pay transaction fees, write smart contracts, or build new Decentralized Apps (Dapps).
During their first four years of existence, the ICOs didn’t raise much of a stir. One here, another there; with modest revenues. And then, out of the blue, they exploded: projects with barely a white paper raising millions in few days (or even minutes), around 50 ICOs launched per month, the Ethereum blockchain saturated because of the high volume of them (something similar to DeFi projects now) and an awful lot of FOMO (Fear of Missing Out) worldwide.
Current successful projects came from there. Sirin Labs (blockchain mobile phones / +150M), Filecoin (blockchain storage / +200M), Tezos (+250M) and the historical EOS (Smart contracts / +4.2B), by example.
However, marvelous scams also cooked easily amid the excitement. One of them was Vietnam’s Modern Tech, which offered two ICOs for their investors. They promised extraordinary Return of Investments (ROI) for two (useless) tokens: Pincoin and iFan. When they raised around 666M dollars, they just flee away with all the money. It was the greatest scam of its time and still fills a position at the top. Yikes.
The bust and Crypto Winter
Winter is coming, they say. That crazy rhythm couldn’t last forever, so, the snow (and the blood) caught the market by the end of 2018. As Michael Casey said at the time: “Bitcoin is now down roughly 75% from its highs, ether is off about 90% and the overall token market capitalization is 80% lower”.
Some countries (like China and South Korea) totally banned the ICOs and these started to have systematical legal problems worldwide. The U.S. Securities and Exchange Commission established that every token promised as a future investment would be regulated as financial security, and their issuers would need to adhere to the official rules (and costs) to get a license.
The European Securities and Markets Authority (ESMA) delivered a similar conclusion, stressing that “firms involved in ICOs should give careful consideration as to whether their activities constitute regulated activities. Any failure to comply with the applicable rules will constitute a [punished] breach”.
According to a study by ICO advisory firm Statis Group, 78% of 2017 ICOs were identified as scams; while another research conducted by GreySpark Partners revealed that almost 50% of the ICO projects failed by 2018, for one or another reason.
In 2019, as indicated by research firm CB Insights, the ICOs fundraising dropped 95% year-over-year. While 2018 gave them 7.8B dollars, in the next year the ICOs only raised 371M. Considering all the exit scams, bad reputation, second-rate projects, and regulations, this probably was the only possible outcome.
There’s even a book telling that story from the point of view of the ICO issuers (a bunch of students).
The ICOs money
As we said before, a great part of the raised funds just disappeared due to bad projects or frauds. The rest are in hands of exchanges, devs, and lucky investors, who managed to buy at really cheap rates cryptocurrencies and products that now are high-valued.
If we check ICObench, an ICO tracker online, we’ll notice that the total funds raised are around 27B dollars, while there are +5.7k published projects. But there’s a trick in there: a good part of it aren’t exactly ICOs, but IEOs (Initial Exchange Offerings).
That’s kind of the same as an ICO, but they’re launched only by regulated exchanges, who cherry-pick the projects by asking the devs for documents, requirements, and fees. That way, the ICO issuers need to apply for a chance to be listed as IEO, and the fraud it’s far way more difficult.
You can say the IEOs are the natural evolution of ICOs. But we learned a good lesson from those times: all that glitters is not gold. And most of the bets are lost, so, never invest something you can’t afford to lose.