Yet the remedy proposed by regulators may actually kill the patient.
Our London correspondent Nick Ayton aka The Sage of Shoreditch, after chairing Blockchain Expo in the heart of Silicon Valley, assess the state of ICOs and the near-term prognosis appears to suggest that in 75 percent of cases we are losing the patient.
12,000 people attended Blockchain Expo in Silicon Valley on 29 and 30 Nov. 2017, to date one of the biggest gathering of crypto enthusiasts, which provided a large enough sample of people in the ecosystem to measure the current temperature of ICOs as an emerging capital market.
There is no doubt ICOs are entering a period of intensive care but should emerge fitter and stronger in the second half of 2018.
Calling doctor BIT (beat)
There are several factors affecting the health of the patient that are inflicted by the many ills of founding teams who suffer from very similar symptoms: poor listening skills, delusion and over ambition. The main issue stems from founders remaining in complete denial of current laws and regulations because they are in Blockchain now.
There is a dangerous trend with founders pushing on regardless, relying on thin and often very ‘doggie’ legal advice, and where in some cases the law firms have naively followed the Howie test and concluded the ‘token’ is a Utility token. Ignoring crowdfunding, banking and unaware they are creating unregulated financial products where the token is clearly designed as a pooling instrument, the sole purpose to gather funds for a project. Under any definition a security!
Change of market direction
We are seeing the end of the Bootstrap projects replaced by business people who see the ICO light that comes with established companies, real customers and revenues. That puts them in the prime position of being able to afford increasingly expensive ICO processes where costs have more than quadrupled in the past 6 months.
With the CME announcement and the emergence of ICO platforms that cater for security tokens offering a regulated governance approach, new crypto funds, emerging ETFs and new exchanges that combine old capital markets with crypto; there is now an ‘on ramp’ for institutional investors, high net-worth and VCs all itching to join in. The operate on the hunch that just a small strip of crypto in their investment mix will drag the mundane performances of 99 percent of funds above market returns without having to do anything.
The spike in Bitcoin price is therefore no coincidence as people start to wake up and big money joins the queue to buy Bitcoin (and Ether), and why the underlying network performances in recent weeks have been slowing considerably. At the time of writing this BTC is approaching $14,000.
The main barrier to entry is the way in which ICOs are currently constructed. Infamous White Papers that promises to deliver a lot without any proper governance or pressure on the founders to actually deliver what was so clearly promised. In the next evolution of the ICO process we will see White Papers look more like an Investment Memorandum and Prospectus (the regulators intention) than the lightweight commentary we see today.
Remember 75 percent projects fail to meet Soft Cap
The volume of ICO projects has not abated and each month we will see a continuing stream of new projects all chasing fewer ICO investors where the pool of crypto enthusiasts (investors) is not growing at the same rate as ICO projects. And people are holding ETH and BTC.
While reported numbers of downloaded wallets suggest the number is 30 million, in reality it is both more and less. More wallets that support social impact programs who don’t yet invest, and the new wallet holders who have woken up, that buy and hold and don’t yet invest. And the popular wallets such as Coinbase and MEW.
Rate of crypto adoption
The crypto market is expanding fast but not enough to keep pace with the sheer number of ICOs.
The biggest factors for the high ICO failure rates remains founder naivety and ignorance, where they think their project is the ‘nuts’ and everyone wants to be involved coupled with bad advisors and advice, setting an unusually high Soft Cap that sets them up for failure and humiliation. ICOs failing to meet the Soft Cap will hurt adoption as the refunds take time to happen and sow the seeds of doubt.
Investing in thin air…
The majority of ICO ‘fails’ are projects with just an idea, as they want to raise money in pre-ICOs to build the idea and pay for an ICO. They are simply not sufficiently developed and come across as such. Asking for investors (token buyers) to give them money to develop the concept? Without considering what is in it for investors? Or why would they part with ETH at $460 in exchange for a token linked to a project that isn’t sufficiently defined? In the past, investors have funded founders’ ideas from early crypto profits, who in most cases have played a waiting game for founders to deliver something, anything, as they are powerless and see their token dump.
Smart money follows real products
The smart money is increasingly drawn to projects where there is something to see, a prototype, MVP or in many cases a fairly complete solution that provides the investor with confidence there is something tangible to the project, that demonstrates the potential ‘pot of gold’ down the road at least… Although some founders think issuing a utility token is enough, and expect investors to become interested users of the platform itself.
I have mentioned before investors are looking for a return, to be able to get in and cash out. Different from project fans who are happy to buy the tokens, or earn them and then spend them on the platform to be an integral part of the new ecosystem.
Companies with real revenues, customers and founders tend to be geared up to meet the needs of the new ICO investors and the shift from the crowd to the institution. As Greshams Laws reinterpreted, Bad money pushes out Good.
Poor underlying metrics
When assessing an ICO’s state of readiness you have to look at the underlying data which tells the level of interest in a project. I speak with many founders that have a decent project and think a few weeks’ marketing will draw in enough of an audience to raise many millions. Whilst some projects can, normally pumped by a celeb, key management team or advisor that raises the profile, the majority of projects aren’t this lucky. Insufficient marketing budgets, poor content and being late to the party hurts so many ICOs and reduces the amount raised. Good projects miss out.
It takes a good eight to twelve weeks at least to get the story out into investor communities. Ideally the team should have been building a following since the projects’ inception, leading to large numbers of social media follows and driving traffic to the website, and then the ICO website. Requiring tens of thousands of hits per week that indicated a state of readiness, to press that ICO Go Button.
You just won’t hit your Soft Cap with 500 on Telegram, 100 website hits a day, 1000 Twitter followers and putting out a little bit of content every day. Volume matters and it amazes me when founders think that as soon as they launch there will be a frenzy towards their project. There won’t be!
Not leaving enough time for the PR and marketing to propagate is a hard but common lesson to learn.
I am constantly amazed by projects that push ahead launching a token that is a security without a care in the world. No KYC or even acknowledgement of the need to find out information about the investor or token buyer.
“My token is not a security” is their answer. Or: “Our lawyer, our advisor said so. We pass the Howie test confirming our token is a Utility token. In any case we can complete an exemption form after the event under 506 and this will suffice.”
All good then.
The goon show is most entertaining when the reality of what the founders have done is explained and the situation they are in becomes clear. Investors wont buy tokens that are securities and not declared as such, and if they do residual Class Actions can result in project collapse..
Then there are simply poorly conceived projects where founders want to reinvent Blockchain, take on Visa, solve world peace and global famine, and others that want to launch a token that don’t explain the underlying Blockchain and why it is needed. At this point the lunatics are most definitely in control of the asylum.
New tokens have no liquidity and exchanges don’t take on new tokens these days. Investors are now aware liquidity is key. The exchanges that are listing tokens that are securities will need to rethink their core business model as new exchanges engineered to handle tokens that are specifically engineered as securities, along with pre-screening investors during ICOs and for secondary market activities.
We should expect some exchanges in 2018 to close or not list any new tokens.
ICOs in their current form cannot survive 2018, and the label of the ‘wild west’ will be replaced by an ICO process that looks more conventional as regulators cut off crowd investor channels, either banning or limiting ICO activity, and wanting to know the owners of wallets.
In reality one shouldn’t be surprised as buying a token (a financial product) that promises a return, entitlement, voting and other value-related attributes is bound to attract attention, and will require a proper Investment Memorandum approach, a Prospectus with commitments, projections and an explanation of use of funds against milestones, and supporting investor reporting and governance structures.
Those pumping the token (financial product) whether PR and Marketing, the founder team and staff or another third party will not be allowed to promote, sell or market socalled Security tokens that are in realty like any other financial product.
Is this all part of the master plan of governments and regulators to squeeze out the crowd using the excuse of protecting the investor or the sub plot to protect banks and capital markets in which their pay packets, futures and allegiances depend?
Let’s not forget ICOs are not the only secret sauce of Blockchain and cryptocurrencies.
Blockchain helps us remove the centre. Makes things tamper proof. Returns trust that has been stripped from businesses since 2008. It is time to build new banks, payment systems and a new range of financial products, platforms and ways of doing things; and use the current rules and regulations to bring the entire system down.
Bitcoin is already a reserve currency for some, a safe haven for others, a protected value. It helps pay back losses to people who were robbed during 2008 while regulators stood back and let it continue.
ICOs will mature. They still offer new options. And while the patient needs some oxygen, he is not yet written off. Token sales are part of a new Capital Market, we have to show we can keep our own house in order!