ICOs are proving to be a valuable and lucrative alternative to traditional venture capital in the blockchain and cryptocurrency space.
When Satoshi Nakamoto first turned on the bitcoin blockchain in 2009, she/he/they couldn’t have predicted how much capital the concept would later create. Less than a decade later, the industry has already generated more than $25bn in funding through traditional venture capital, community-based funding and simple agreement for future tokens (SAFTs) made by accredited investors. But who is investing in what?
According to a KPMG analysis for the first half of 2018, blockchain investment in the US exceeded the total figure for the prior year. The company attributes its growth to increase interest from the financial sector, which is rapidly identifying new use cases for the technology.
We are also starting to see some of the speculation and proof of concept technologies emerge into viable systems. KPMG cites the Australian Stock Exchange’s commitment to blockchain-based post-settlements, and WeBank in China putting syndicated lending on the blockchain with support from at least three mid-tier banks.
Investment models
Blockchain investments have been spurred along by traditional venture capital money. CryptoFund Research counts 196 crypto VC funds at the time of writing, and some of them are bringing hefty amounts of capital to the table. Andreesen Horowitz launched a $300m cryptocurrency fund in June, for example.
Courtesy CryptoFund Research
Those VCs are stepping up with much-needed capital. VC funding for blockchain and crypto ventures had reached a total of $4.3bn by July 2018, according to CoinDesk’s State of Blockchain Q2 report.
Q2 saw $1.1bn of that funding – around a quarter of the total – in 178 deals. The lion’s share of those were under $5m, indicating that the startups getting the cash are still relatively young and at an early stage in their growth cycle. CryptoFund Research confirms that, citing seed funding as the most common deal type among the 50 top blockchain VCs over the year to June 2018.
Banking and fintech opportunities
Blockchain-focused fintech did well from VC funding. In the first half of the year, R3 (the banking consortium that produces blockchain-based financial systems) scored over $100m from Intel and a collection of banks. Pintec, which received $103m in a round led by Mandra Capital and SINA Corp, provides retail financial solutions based on blockchain technology.
US Harbor, a blockchain-based platform that tokenizes assets for trading, raised $38m across two funding rounds this year. Blockchain-based settlements firm Paxos raised $65m in series B funding to help it scale up its blockchain platform. Circle Internet Finance, which runs cryptocurrency payment services and also acquired exchange Poloniex, raised $110m from Chinese bitcoin mining firm Bitmain.
Not all the big VC blockchain and crypto deals have focused on fintech, though. Bitmain itself raised $300m from Sequoia Capital in June. French hardware wallet company Ledger scored $75m in series B funding at the start of 2018, adding to $7m in initial funding last year.
ICOs outpace venture capital
While venture capital may be piling into blockchain-related investments, ICOs still dominate by a mile. According to Coindesk, there were 192 ICOs in the second quarter, raising a total of $7.3bn in funds. That brings the total amount raised in ICOs to date to $19bn, meaning that almost 40% of total ICO capital was raised in just the second quarter of this year. This shows just how quickly the ICO phenomenon is accelerating.
To be fair, though, Block.One gave that figure its massive bump. The company, which created the EOS decentralized application platform, currently ranks as the biggest ICO ever, having raised $4bn in the year leading up to July 2018.
The next biggest in 2018 was Telegram. That points to another interesting fact about ICOs: the power distribution laws are skewed. These two ICOs alone mean that a tiny percentage of the apps account for a significant proportion of the funding. In its July 2018 joint report on blockchain funding with Crypto Valley, PwC dubs these the first crypto-unicorns.
The PwC report also shows almost exactly when the ICO funding frenzy took off: May 2017. Until that point, the amount raised in ICOs each month hovered well below $100m, save for a one-off spike in May 2016. In May 2017, it soared to $776m, as the number of ICOs also began to rise substantially.
Since then, it has been a rollercoaster ride due in part to the few unicorns that make the growth curve spiky, and the wildly fluctuating cryptocurrency exchange rate, which makes the pricing trend unstable.
What are ICO communities investing in?
ICO investments range across the board. Block.one focuses on blockchain infrastructure, whereas Telegram is a social media/messaging play. The third biggest ICO in PWC’s report when it was published was Dragon, which creates decentralised currency for casinos.
Since then, TaTaTu pulled in $575m for its blockchain-based social entertainment network, which offers premium content from household brands and rewards watchers with tokens.
While the biggest ICO funds span industries from data storage to the Internet of Things, there are a couple of industries that stand out. One is blockchain infrastructure – the building blocks on which other blockchain startups are often built.
Aside from Block.one, we have also seen Israeli company Orbs raise $118m in an ICO for its Ethereum-enhancing decentralized application production system. The blockchain interoperability project Polkadot raised $145m in its ICO, and Tezos raked in $232 for its decentralized application platform.
The other common industry is fintech. Basis scored $133 for its stable cryptocurrency project, Bankera raised $150m for its cryptocurrency banking service, people invested $150m in Bancor’s direct token conversion venture, and Huobi Token, the blockchain-powered loyalty point system, earned $300m.
Price volatility
The price of bitcoin and other cryptocurrencies may have tumbled recently, but that isn’t stopping both venture capital and retail investors from piling into what they see as promising prospects in the blockchain space. Companies such as Andreessen Horowitz have said that they’re in it for the long haul, rather than to make a quick buck, and will hang onto their shares.
Investors clearly expect this to be the next great wave in tech growth, following on from investment waves sparked by trends like the Web and Web 2.0, which generated such vast returns. Keep watching – it’s going to be a fascinating ride.
Text by Danny Bradbury
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