Collapse of the ICO market: which way forward?

Collapse of the ICO market: which way forward?


Note: The following post is a shortened version of an article, posted in Medium which can be read here. The article was first published in Svet Kapitala — 2 November 2018, in Slovenian language.


The end of last year has undoubtedly served with unusually diverse and interesting events in the field of cryptocurrencies. As the latest fad, the blockchain technology regularly filled the covers of newspapers; the general public’s view expanded beyond Bitcoin (as the most known cryptocurrency), and reached other cryptocurrencies such as Ethereum or Ripple.

The model of Initial Coin Offering or ICO enabled a simple and global way of crowdfunding, which was received open-handedly by start-ups. Because of the enthusiasm for new technology and the aspiring wishes of investors to make quick profits, also the start-ups, formed by young entrepreneurial teams without any business experience, and start-ups who promised extremely poor, useless or even unfeasible solutions, were successful.

A rising tide lifts all boats…

Many individuals who jumped on the »crypto-train« earned a lot of money, without even having to know much about the technology behind cryptocurrencies itself. A rising tide does lift all boats, and at the end of 2017 it seemed that we had invented a game in which each lottery ticket wins. Euphoric emotions started dominating the market, and the dreams of the bright blockchain future detached from the technological reality on which they were based.

However, less than a year later, the market picture is completely different. The recent report by Ernst & Young (link) states that as many as 86 % of existing crypto tokens are worth less than what they were at the time of issue. Anyone who invested in the “basket” of the most successful ICO projects in January, would lose 66 % of their investment by October. In the process of issuing new tokens, start-ups are now confronted with saturated market and are facing more and more difficulties when trying to raise funds.

From euphoria to public tenders

On the other hand, existing projects (successful stories from the last year) face developmental difficulties and for them it is increasingly challenging to navigate in the unpredictable and unclear regulatory and tax environment.

Instead of words about Slovenia as a “blockchain heaven” and the adoption of the most advanced regulation that will stop the brain drain, we can now listen to speakers presenting how young start-ups can gain funds in public tenders. It thus appears that the blockchain sector has transformed from the field, which was supposed to stimulate accelerated economic development and thereby also have a positive influence on the state budget, into an industry requiring state aid.

Nevertheless, the fact is that many projects, including Slovenian, continue to work and silently, but constantly develop their products. Faster, transparent and secure transactions through data block technology or its alternatives  still offer numerous opportunities that will be implemented in both business practices and public systems (for example public registers, such as Land registry or Commercial registry) sooner or later.

Good practices and trends

A known maxim says, we tend to overestimate the effect of a technology in the short run and underestimate the effect in the long run. Now it is a good time for a realistic assessment of the situation in which the entire industry ended up, as well as the time to correct some of the “excesses” of the previous year. In this way, we can extract some of the increasingly obvious good practices and trends that can become the bearers of the future and gradual development:

– In the field of payment cryptocurrencies: the development of stable coins that eliminate the main shortcoming  — severe price volatility;

– In the field of utility tokens: “ICO 2.0” and “reverse” ICO, which returns the ICO model from the grey zone of quasi-non-regulated investment to the  massive crowdfunding to support the development of a particular project and its actual use among supporters;

– In the field of investment: the accelerated development of tokens that will represent pure financial, equity-like instruments.

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