Four Reasons Why ICO Funding Is Slowing
Initial coin offerings (ICOs) have quickly emerged as a multi-billion-dollar industry, but concerns over regulation are compelling many startups to think twice before issuing their crowdsale. These regulatory hurdles, combined with greater investor scrutiny over prospective raises, suggest that the ICO market is about to shift into lower gear.
ICOs by the Numbers
Depending on who you ask, ICO funding was on track for a record-setting month in November. According to data collected by Argon Group, nearly $500 million was raised in the first half of the month. That’s equivalent to roughly 75% of the September total, when startups raised $663 million. This translates into 25 times the funding seen just one year ago.
However, the latest CoinSchedule data suggest that only a fraction of that total was actually raised last month.
Crowdsales have generated more than $3.5 billion in funding this year alone, easily outstripping early-stage venture capital. ICO projects touch virtually every industry, with infrastructure and trading tend to be the most common.
Five Reasons ICO Funding Is About to Cool
Launching an ICO has become the gold standard for startups wanting to raise capital as quickly as possible, but there’s evidence to suggest that the early-stage euphoria is beginning to wind down. This doesn’t mean coin offerings are dying. Quite the contrary, as a matter of fact. As the industry evolves, the quality of the crowdraises is expected to improve. Vitalik Buterin, founder of Ethereum, says ‘Tokens 2.0‘ will provide much more noteworthy ICOs that are of significantly higher quality.
The immediate cause of the sudden slowdown in ICO funding is tied to China’s ban on token sales. The all-out ban occurred in early September, and eventually led to a sharp slowdown in the amounts raised during the month of October. The ICO ban quickly spread to South Korea, a nation with otherwise very lax cryptocurrency laws.
ICOs continue to operate in regulatory purgatory, which means startups are thinking long and hard about what type of token to issue and where to implement their crowdraise. In the meantime, the European Union (EU) appears to offer the best opportunity for a headache-free crowd sale. The region accounts for nearly half of total ICO funding, according to a recent report.
Murky regulations have compelled the blockchain community to take matters into its own hands. This has led to the development of the Simple Agreement for Future Tokens (SAFT) project, which is intended to create a self-regulated industry capable of navigating U.S. securities laws.
SAFTs are gaining traction among ICO issuers, but may not be as safe as previously envisioned. A compelling report from the Cardozo Blockchain Project recently argued that SAFTs “could heighten the exuberance manifesting in markets for blockchain-based tokens and make it even more difficult to provide consumers access to potentially impactful new technology.”
If SAFT is the way to go, it may be a while before the industry adopts it as the standard protocol.
Gone are the days where an ICO can raise $20 million on the back of a whitepaper. Investors are much more cautious today than they were just a few months ago. In addition to concept, the public wants to see solid use cases and a viable business model underlying the crowdraise. They want more information about the team, and expect to have all their questions answered promptly.
Investors are still pouring money into crowdfunding campaigns, but with hundreds of projects launched weekly, the standard for token raises is higher than it was before.
Rise of Scams
One of the reasons why investors are scrutinizing ICOs so closely is the growing prevalence of fraudulent projects. It’s not uncommon for a scammer to copy an ICO, re-write the whitepaper and launch a website with pictures of advisers they found online.
Then there’s the U.S. Securities and Exchange Commission (SEC) charging two ICOs with fraud. The regulator has warned investors to be weary of false promises of sizable returns from token sales.
As we mentioned earlier, a slowdown in the ICO space could be a very good thing for an industry experiencing exponential growth. A more conscientious token sale market may also help shake off the blockchain community’s speculative image. But regardless of where ICOs end up, blockchain technology is here to stay. It utility has proven far too valuable to ignore, even though many do not care for the cryptocurrencies it helped create.
The cryptocurrency market is worth more than $320 billion. Sixteen digital currencies are valued at $1 billion or more, with nine others worth at least $500 million.
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