ICOs have experienced an incredible growth story over the past five years, with volumes reaching US$ 13.7 billion in the first half of 2018. They have become a widely used fundraising instrument, attracting interest from both, retail and institutional investors – and the bullish run seems far from over.
Just a few years back, nobody outside the small circle of tech nerds and crypto geeks knew what an Initial Coin Offering (“ICO”) was. Even financial industry experts couldn’t really explain the concept. That, however, has changed in summer 2014, when Ethereum raised US$ 2.3m (3,700 BTC) within the first 12 hours of a token sale.
The first reported ICO took place in 2013, conducted by Mastercoin (now called Omni). Mastercoin raised a respectable US$ 500,000 (5,000 BTC) – not bad considering that this was the first ICO ever and not many people even knew what an ICO was back then.
One year later, in September 2014, the Ethereum ICO took place, closing at a total of US$ 18.4 million. In May 2016, the DAO ICO caused huge excitement throughout the blockchain industry: 10,000 investors anonymously poured US$ 168 million into the project.
The DAO’s ICO success was like the Big Bang of blockchain-based fundraising. In 2017, 552 ICOs raised more than US$ 7 billion. By then, ICOs were all over the news, and far from being the niche phenomenon they were in 2013.
The first half of 2018 saw again a huge spike, with ICO volumes reaching US$ 13.7 billion, doubling the total amount raised in 2017. ICO volumes in 2018 were propelled by two major deals: Telegram, which raised US$ 1.7 billion, and EOS which raised a whopping US$ 4 billion.
ICO growth is mostly driven by the overall success of cryptocurrencies, the rise of blockchain technology and attractive ROIs
There are several growth drivers of the immense and rapid success story of ICOs.
Firstly, the market capitalization of cryptocurrencies has increased from just $7 billion in January 2016 to over $186 billion in September 2018. Some early cryptocurrency investors are therefore sitting on hundreds of millions worth of cryptocurrency. ICOs are a way for these investors to diversify their crypto portfolios, without having to convert crypto to fiat currency.
Secondly, blockchain technology and the concept of decentralization have gained in popularity. As the technology is improving, more traditional investors, like Venture Capital firms, are seeing the benefits and pour money into blockchain projects.
Another growth driver are the ROI prospects of ICOs. Ethereum investors, for example, have achieved an ROI of 65,656% since its ICO in 2014. That said, crypto prices are highly volatile, so these ROIs don’t necessarily promise sustainable long-term value creation, but they certainly attract the interest of speculative investors.
Lastly, an ICO is not just a fundraising solution, but also a way to create a community of loyal followers. Buyers are oftentimes not only growth investors, but have an interest in the exchange of information and the value within the product. They are not only investors, but also customers who identify themselves with the token they buy.
As ICOs are unregulated and risky, STOs could set the standard for the future of blockchain-based fundraising
Although ICOs have certainly had a more than impressive growth history over the last five years, they are also facing challenges.
ICOs are risky. According to PWC, only a third of all ICOs close successfully. Regulatory and compliance issues, delays and loss of momentum are problems that often occur during ICOs, especially if the management team lacks experience.
So, what’s next?
In future, the market could see a decline in ICOs and an increase in STOs (“Security Token Offerings”). STOs offer a security token, hence, an investment product, and they have to comply to strict financial market regulations.
As the industry matures and regulations improve, illegitimate companies will be weeded out, which could result in an overall slow down across the industry. However, those players that will remain will see greater overall success, because more retail and institutional investors, who are looking to invest in highly-compliant products, will enter the space.