Observations of the ICO segment

Initial coin offerings continue to raise substantial amounts of capital. There are several token sales that would appear to blow out the numbers (Telegram/TON for example) however, market sentiment is still relatively strong. As of April this year, the figure has already surpassed $3.5b.

ICO raises by industry

While demand for new projects is still strong, we observe several factors that have changed substantially since 2017:

1. Private sales account for the majority of ICO contribution.

In many instances, companies have raised 100% from private investors and have cancelled any intended public offering.

Alot of this comes down to SEC regulation, demand from managed funds/syndicates and, quite simply, the ease of running a closed sale in comparison to managing tens of thousands of investors (where the average contribution is less than $1000). This shift has somewhat created a private and priveledged market whereby key players are getting exposure first and leaving just small allocations to the public retail segment.

While this is a good thing for new ICO projects, insto investors and managed funds, we do foresee repurcussions of this method in the future.

Why? Put simply, a coin offering that has a spread amongst 1000 private investors will never have the market reach, nor the emotional ownership effect that a public sale would of 30,000 investors.

This does not create a funding issue, but it does create a market engagement problem. Time will tell if ‘airdrops’ will suffice in creating market spread to boost active trader numbers, however, we are not confident that this is a long-term fix.

2. Lock-up and distribution periods are getting longer.

Likely linked to the shift towards private sales, token distribution timeframes have become substantially longer. In 2017 it was not uncommon to see liquidity events within a week of the close of tokensale (particularly Binance sponsored), however, as a more mature market prevails, smart companies are taking their time to produce real results before diving into the daily mayhem and distraction of their token price performance.

This isn’t a bad thing.

In fact, it’s a sign that the market as a whole is progressing towards more of a venture capital/private equity approach whereby key investors have to show true support for the project instead of dumping it on the open market as soon as they get a chance.

There have been certain projects that are pushing the barriers of comfort for investors, predominantly domiciled out of the USA where they are seeking lockups of over 24 months. In our view this is a tough ask and certainly something we avoid as a more liquidity-focused manager.

3. Strong demand for new blockchains and protocols.

Market participants are still looking for their next ICON or Ethereum. New blockchains are highly in demand as we observe oversubscription and outperformance of such projects as Quarkchain (QKC) and Zilliqa (ZIL).

While we expect this trend to continue for the short term, there will be a time when the worth of such projects is detached from the amount of transactions per second (TPS) they are capable of, and instead calculated based on market penetration, usability and developer engagement.

4. Vaporware and bad ideas are becoming less prevailent

In 2017 the ICO frenzy brought with it some really bad businesses that raised serious money. Day by day, we are seeing less ‘Uber for x on the blockchain’ and more quality projects actually focused on decentralization.

Bananacoin reached almost half of their cap for decentralized bananas.

Retail and consumer focused ideas that have nothing more than a whitepaper seem to be licking their wounds after failed raising attempts.

We won’t go as far as to rule out all tokenized consumer applications. We see very relevant use cases for those who have already proven a market need, where the bridge to adoption of a token is not far from a ‘credit purchase’ through your Apple account.

Projects such as Gifto (GTO) and Current (CRNC) have real-world use cases where the point of adoption is much closer than you would think, particularly when they give the existing consumer-base no alternative.

Current (CRNC) topping the charts of free apps

Segments we like

There are several corners of the market that we believe will evolve much faster than others.

Decentralized exchanges

DEXs probably have the largest opportunity at the moment. The barrier to entry of getting onto a top-tier centralized exchange without paying millions of dollars upfront is extremely high. In our view, this can’t last long.

The launch of P2P exchanges such as Airswap and Bancor that are actually focused on usability and consumer experience are the projects that will be successful in the long term. While we commend Binance and others for launching great platforms, it has resulted in a monopolized environment where good quality (and bad quality) tokens are being forced to give up a substantial portion of capital for the ‘privelege’ to list and get a 2x increase on their first day of trade. It doesn’t sound very decentralized does it?

AST launches their P2P platform

Our only caveat to the DEX segment is that there are too many new projects that are trying to ride the wave. A significant amount of DD is needed before stepping into any new exchange related ICO as there are many existing projects much further advanced in the adoption curve.

2. Security token solutions

Platforms and protocols that focus on solutions to tokenize real-world assets such as property, shares, bonds etc are ahead of the curve.

Fractional ownership will soon become a word closely associated with blockchain, where anyone can have a share (tokenized) in almost any physical, or non-physical asset.

While we would never invest in an ICO that simply ‘buys property and tokenizes it’, we would invest in the underlying protocol that facilitates the whole transaction and process of fractional ownership (think TrustToken). We see this segment as a winner.

3. Privacy tokens

Privacy tokens remain a large segment that we believe are on the ground-floor. As the worlds paranoia gets worse by the day, the applications of privacy related apps and currencies become more apparent.

Existing coins such as Monero (XMR) will always have a place in this world, however the privacy segment needs to move beyond simply facilitating currency purposed transactions.

A recent project we supported, Loki (LOK), has forked Monero to create a foundation for the open-source development of privacy related DAAPs (the first being a messenger).

Our expectation is that this segment will grow substantially over the coming years.