- let’s be honest with each other. Before 2017 the majority of the world’s populace haven’t heard about cryptocurrencies and blockchain. Even if some of them have, it was news about some scam, some nerd IT guy’s pastime or as a way to pay for illegal goods on the black market. Yet 2017 has drastically changed this. News about millions of dollars worth of profits, blockchain based bank systems, celebrities promoting ICOs — all of this has created a paradigm shift in people’s thinking.
Blockchain and cryptocurrencies have entered our lives and they are not likely to go away.
It would be perhaps fair to say that we’re talking about blockchain as a way to store data that could be useful for companies and corporations, as well as banks and government institutions. Applications are numerous and all of them can make jobs easier and more efficient for millions of people. However there is a dark side to this technological boom. In 2018 thousands of companies and millions of individuals lost money invested in cryptocurrency projects. Reasons for these losses were many: investing in an unsuccessful project, losing the money on numerous exchanges, getting your money stolen by hackers. But nothing brought as much disappointment as so called ICOs.
- So what happened?To answer this question we have to understand what is an ICO, what it should have been and what it became in the end. ICO means “initial coin offering”, similar to IPO, which is “initial public offering”. A company or an individual issues a virtual coin in the virtual space, which later on can be used to pay for a product or a service within the boundaries of a certain project. In other words, if startup X wants to raise money from investors, rather than going to investment funds or business angels, it has to issue X-coin, state that the X-coin’s price will very soon increase since the X-platform will only operate via X-coins, and the platform itself will eventually become the new Google or IBM, so, you know, the X-coin will no doubt be the most sought after virtual thingamajig in the whole world. But in reality there are very few laws and regulations protecting crypot-investors, so nobody can guarantee that Project-X won’t just run off with the money or lose it due to incompetence and inability to deliver the promised product. Furthermore, even if the product is finished as promised it can still fail to impress the market.
A second important factor related to ICOs is that the funds are raised all at once. In other words, unlike the traditional venture market, investors do not fund every stage of product creation while scrutinizing its quality and separately providing funds for marketing in several rounds of funding. No, ICOs raise millions of dollars all at once for the whole duration of the project up to the moment it becomes self-sustainable. This way a project with an ICO can keep promising a fortune for its investors for many years, while basically having zero financial control. The largest ICOs of the past two years — BANKEX, Filecoin, Tezos, Bancor — have raised tens and hundreds of millions of dollars, yet despite investors’ expectations the price of their tokens remained low, or worse yet, their money was lost, or, like we said before, the product was amazing only on paper and the market ignored it.
- So, this way of collective funding does not work and we cannot rely on ICOs to raise money? Yes and no. Thing is, most of the projects in recent years offered “revolutionary” or “unprecedented” blockchain solutions, which needed millions to develop, yet the real world application of these products could be imagined only by industry specialists. Regular token buyers just wanted to get that tenfold return on their investments, and payed little to no attention to any of the technical documentation or the problems a startup proposed to solve. Only recently we began to see projects offering either simple stable coins — True USD, Gemini Dollar, USD Coin — or logical and legitimate examples of stable income via collective financing of real sector products, like Product Protocol. As a result we are entering a new stage of blockchain financing evolution, where boundless hype and hunger for quick and easy money are being replaced by stable income, institutional investors and the calming of the market. Healthy products listed above prove that disappointment and thwarted hopes have cooled the market down, it matured and is prepared to allow only stable income projects.
That doesn’t mean that ICOs are going extinct, it means a new, more mature version of the new millennium fund raising.