Opinion: It’s time to seriously rethink ICOs

Photo credit: Marta Branco

Joel is a TIA Star Contributor and publishes high-value content that serves the Asian tech community. Read more from TIA Star Contributors here.

For the past two to three years, initial coin offerings (ICOs) have been regarded as a new and revolutionary way to invest and raise capital.

In 2018 to date, nearly US$6.3 billion have been raised across 978 ICOs (at the time of writing). However, this is still a mere drop in the ocean compared to traditional VC fundraising, which reached US$49 billion in the first quarter of the year alone.

While tokenization has grown into an important funding avenue and has, to a degree, become accepted as part of the mainstream investment industry, I don’t think it will replace the majority of traditional investment routes anytime soon.

With all this in mind, I believe now is the time to review, and maybe improve, the ICO phenomenon in terms of regulation, effectiveness, and sustainability.

ICOs are no longer a growth-hack funding route

Many ICOs fail—and some fail spectacularly.

In an industry comment piece earlier this year, Bitcoin.com highlighted a survey by Tokendata, one of the more comprehensive ICO trackers that lists all 902 ICOs from 2017. According to the survey, 142 ICOs have failed in the funding stage and 276 others have failed because of other factors.

“This means that 46 percent of last year’s ICOs have already failed,” the report stated. “The success rate of 2017 to 2018 is significantly low based on my observation. And it becomes harder to get attraction from retail or community investors.”

Part of the problem is that regulation is not yet set. The regulatory direction of token securitization will have a huge impact on the overall ICO trend. Some governments are trying to demonstrate leadership by providing proper licensing and schemes to support ICOs.

For example, Malta passed three bills around cryptocurrencies, blockchain, and distributed ledger technology in June. However, part of the legislation is not yet in force, highlighting the two-steps-forward-one-step-back progress that has been typical of attempts to create legal ICO frameworks.

Are ICOs still a viable funding route?

I want to highlight two trends that I’ve noticed.

First, retail investors expect higher standards: when any financial product is going through a hype period, retail investors take a hit-and-hope approach—they invest first in hopes of catching the wave and ask questions later.

This means that their financial decisions are too often guided by animal instinct and herd mentality, without careful observation of business plans and feasibility (in this case, the feasibility of business fundamentals underlying a given ICO).

My advice to founders and investors