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We Have to Fix ICO’s in Order to Fix the Crypto Market

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The crypto market is hurting right now. At 80% off the highs on average, it’s damaged pretty badly, but not irreparably. The time to repair it could range from months to years depending on whether or not this critical piece will happen.

The Perfect Storm

First, let’s look at what is broken.

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Up until recently (January of 2018 to be specific) crypto was a perfect case study in exponential growth.

There’s a good reason for that — after all, crypto was nearly a perfect “product” — a tremendous exponential growth curve and a buzz second to none (even Apple and Tesla).

Now, I’m a product guy and a product manager who has brought multiple products to market, which means that I take special interest in product adoption.

Adoption has head winds and down winds. In the case of cryptocurrency, after the initial obscurity period that lasted almost 8 years, the down wind was very strong — after all who’s not looking for a superior investment vehicle that can provide them with 10x returns in a few years time? Out of all the adoption motivators out there, this is by far one of the strongest! In addition, there are quite a few places with unstable political and economic situation, where keeping money in a local currency is subject to high risk — the most recent example being of course Venezuela where the local currency all but disappeared almost overnight.

The headwinds included regulatory uncertainties, a steep learning curve, the speculative nature of some (many) “products”, and manipulation and security threats. While all unpleasant, they were all being dealt with slowly but surely.

who’s not looking for a superior investment vehicle that can provide them with 10x returns in a few years time

Who / What’s at Fault?

The biggest thing that happened, in my opinion, which messed up the market growth dynamic so badly (real badly) were the ICO’s — large and mega-ICO to be specific.

What is an ICO? Unless you’re completely new to the world of crypto, you must be familiar with the term — it means Initial Coin Offering. It’s a way to raise money by selling coins or tokens that will be the unit of value on your blockchain or for your Dapp (decentralized application).

Originally the concept of the ICO was developed by a guy by the name of J.R. Willett. He raised a whopping total of $500,000 for his Mastercoin project in 2013, which was supposed to be an improvement on Bitcoin.

What followed was all but disastrous. The market saw thousands of ICO’s — almost up to 100 per day at its peak, with some that raised hundreds of millions of dollars in funding.

$90M was raised through ICO’s in 2016, $6B in 2017 and so far almost $7B in 2018.

Now, let’s follow the money trail here. Where’s this money going, what is it doing?

Most of the regular crypto investors are either HODL’ers (long term investors) or short-term investors (daytraders) — both categories hold on to the funds specifically for the purpose of investing in crypto or other assets, so the pool of already invested or ready-to-invest funds grows.

Now, when you throw ICO’s in there — all those billions of dollars raised are being exchanged back into fiat in order to pay salaries and other operational expenses (but also to throw lavish parties, buy yachts and homes). That money is NOT COMING BACK to the crypto market. EVER. What’s more — the treasury funds that were being kept in crypto to be sold later will be (and are being) sold as soon as there’s signs of trouble that crypto prices are going to stay depressed — it’s natural as ICO projects have expenses to pay today and can not afford to “wait it out” for a better market tomorrow.

That money is NOT COMING BACK to the crypto market. EVER.

Ethereum in particular is the biggest casualty of the ICO movement as 99% of the ICO projects were ERC tokens, so raising funds in ETH was the natural thing for them to do. In fact, it’s estimated that there are still 3,744,651 ETH in ETH funds raised by ICO’s that are waiting to be sold (roughly 3.5% of total ETH supply), with over 900,000 ETH liquidated in the past 5 months. Prior to the liquidation, the total amount of funds held in treasury was 4,651,675 ETH (or roughly $1,758,333,150 at this time). (Source: recently published Diar.co report)

Image credit — diar.co

To appreciate the effect of selling crypto holdings has on the market dynamics, let’s consider how the price moves — both up and down.

If there’s equal amounts of buying and selling, the market will trade sideways.

If there’s a little bit more on either side, the markets will absorb that and the swings will be insignificant.

However, if there’s a larger disbalance, we will quickly see it swing wildly to one side or another (lately it has been mostly to the downside). It’s pure math and a little bit of investor herd psychology.

You can see how disbalances on either side can quickly move the market to high gains or high losses. The market drop of the last 6 months is indicative of a trade disbalance with strong cash-outs.

The only hope to stabilize the market is to raise activity on the buying side to get a lot more upswing days then downswing ones. If this doesn’t happen, we’re in for a lot more “correction” with market taking further beating and investors getting discouraged, eroding the market further.

if there’s a larger disbalance, we will quickly see it swing wildly to one side or another

So are ICO’s bad?

Let’s look at the ICO’s vs. traditional fundraising.

In the traditional fundraising environment a team raises a small seed round (typically anywhere from $250k to $1M) and has to bring a minimal product to market with that money before it can go back to the investors to raise more. The process repeats, with each subsequent round raising the bar and the amount — so for round A a typical raise would be 3–5M, and for round B — 10–25M, etc.

The ICO’s, on the other hand, compress all the rounds into one big (sometimes huge) round, so there’s really very little accountability or incentive for them to meet interim deadlines, test product theories on the real market, or make necessary pivots.

VC’s will tell you that if you flush a startup with money early on, it’s a recipe for disaster.

So not only is it bad for the crypto markets that these mega ICO’s are caching out, pulling the money out, it’s actually bad for their business as well.

VC’s will tell you that if you flush a startup with money early on, it’s a recipe for disaster.

Can it be Fixed?

So what, if anything, can be done about this situation now and how long do we have to wait for the market to recover?

The answer is, as is the case with most complex systems, — “it depends”.

If the ICO’s go back to raising the minimum amounts necessary to start and sustain the projects, there’s a very good likelihood that the balance of the inflows to outflows will fall in line and the market will get back to the overall growth trajectory.

There’s some indication that this is already happening, with the funds raised in 2018 and the average size of the ICO going down. Whether this is a temporary or a permanent phenomenon remains to be seen.

If there was one message I could send to the projects that are aspiring to do an ICO right now it would be “please don’t be greedy” — raise only what you need to build an MVP (Minimum Viable Product) to prove out your product theories — it’s good for the crypto market, and will ultimately be better for you!

Dear ICO’s, please don’t be greedy — raise only what you need to build an MVP — it’s good for the crypto market and good for you!

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