Are ICOs Dying?

By Michael K. Spencer,
Nov 16th, 2018 | 4 min read

Initial coin offering (ICO) funding was already undergoing a significant pullback, per data from Crunchbase and CoinSpeaker, in the summer. Now there’s increased evidence this trend has indeed occurred.

In fact all evidence points to a huge fall in ICO fundraising in Q3 of 2018. The report, which was conducted by independent research firm ICORating, notes that a total of just over $1.8 billion was raised by a total of 597 ICO projects in Q3 2018, down significantly from the over $8.3 billion that was raised in Q2 2018. You can read it here.

  • Only 4% of ICO tokens have actually been listed on exchanges
  • 57% of ICO projects not being able to raise more than $100,000 USD

Some reasons for the decline of ICOs put forth are:

  • High frequency of scams and fraud
  • Uncertainty regarding regulation
  • A decline in value of some of the most hyped ICO products from earlier this year
  • A general disappointment in the state of the markets (the crypto hangover).

Increased scrutiny by the SEC in America means it’s harder for blockchain startups to reach investors there. This makes it less profitable and riskier for them to even do ICOs, when arguably one of the largest markets remains fraught with uncertainty.

Furthermore ICOs have a bad reputation that has discredited many digital assets and a recognition by the market that many of these altcoins won’t exist in the near future. That is, the failure and churn rate is extremely high among them.

  • Lack of a viable product
  • Part of an exit scam (“shitcoins”)
  • Startups run out of money and software code death occurs
  • Lack of product market fit (the product is premature)
  • Trust in ICOs have plummeted meaning it’s harder to raise funds generally
  • Rise of crypto funds and SCOs could replace ICOs
  • Regulatory risk means even doing an ICO is no longer the best option for many companies.

It’s not just that the market in Q3 shows signs of overall disappointment in traditional ICOs as a means of venture financing, it’s that crypto hedge funds and digital asset based venture capital funds are also rising to meet the demand in a more private way, with a market that’s more conducive now to private sales than public ICO type timelines, when the crypto bear market and high frequency of scams no longer favor them.

The U.S. SEC released a report that said reducing ICO-related fraud is among their top priorities. The rise of the digital asset crypto class is likely to favor a few big winners among the crypto altcoins, and a wide majority of losers and consolidation occurs. This amounts to a lot of crypto death, and a startup cycle for blockchain startups that remains rather ruthless and unforgiving.

While some argue that ICOs can’t die and aren’t dead, the evidence does point to a cryptoeconomic reality where ICOs play a much smaller role in the future of how blockchain startups scale and how cryptoeconomics really fuels new startups. The rise of crypto funds (traditional Venture Capital) is probably correlated with the decline in public trust in ICOs. This means digital assets are still quite speculative and, while investment occurs in them and will likely rise overall, the regulatory push in how this occurs will gradually feel less like the wild wild west.

Blockchain startups that don’t even have a live product, a listed token or an army of supports will have a hard time sticking around in such a crowded market. Furthermore staying alive until they are truly viable and can scale will prove more difficult than the amount of sums they are able to raise would suggest. There’s one scenario where ICOs as we knew them in early 2018 will be completely replaced by better solutions.

Crypto communities and entrepreneurs failed crowdfunding, without a mechanism whereby fraud and scams could be rooted out. Considering how centralized EOS is, one could easily say the biggest frauds killed ICOs. Crowdfunding didn’t fail crypto, in fact perhaps they were too successful to sustain their integrity and scale in a responsible way without better regulation, oversight and structuring.

We live in a world where over half of ICOs die within 4 months. Just doing an ICO therefore is like one step further towards crypto death. Just as many private companies are not ready to go IPO and do it prematurely to raise capital, the same goes for blockchain startups (many of whom do not have a clue). Does this mean that ICOs will die off completely and suddenly? Well, no. However the proportion of companies experiencing coin death versus those that build incredible communities and products will become even more lopsided.

Although ICOs were a popular fundraising method in 2017 and early 2018, the Crypto Singularity and the Crypto Hangover are very different times to live through. ICOs may just be too risky, prone to fraud and dangerous for all parties to continue as they are. The digital asset markets need to evolve as well as public blockchains and all with better governance, oversight and regulation to truly flourish.

The first ever ICO took place in 2013. Just five years later the ICO is in some ways an outdated construct.