Blockchain and cryptocurrencies are evolving at a stellar pace.The ever-changing industry has taken the world by surprise when more and more projects started to finance their ventures using an Initial Coin Offering — the famous ICO.

If you want to learn more about ICOs, here is investopedia’s definition.

In addition to “ICO”, multiple other names have been given to the creation of a new coin eventually sold to investors, such as token generation event, security token offering (STO), and initial token offering (ITO). The names vary depending on local legislation and terms the local blockchain professionals have adopted. In sum, regardless of their name, they enable projects to crowdfund by targeting public investors, especially retail.

ICOs are raising interest and capital — $21B in 2018:

Which is higher than the $6B in 2017:

Source: https://www.coinschedule.com/stats.html

The age of ICOs

Created in 2009, Bitcoin kickstarted the age of cryptocurrency. It raised no money at first, but people could let the Bitcoin network use their computers to maintain and confirm transactions for the Bitcoin network. The people who provided the computing power got rewarded in Bitcoins. This was a standalone network but the technological potential stimulated multiple minds.

Flash forward to 2014, Vitalik Buterin presented a new, more programmable blockchain named Ethereum, which enabled more than transactions — it permitted to smart contracts, an autonomous software. The smart contract allowed for the creation of tokens that would leverage Ethereum’s network to record transactions or provide computing power. In 2017, this gave rise to the era of decentralized applications (Dapps) who mostly used ICOs to finance their ventures.

These new ICOs were public coin or token sales that anyone could participate in. With time, authorities sought to regulate but the rules were still unclear in multiple jurisdictions. Most ICOs were accepting Bitcoin (BTC) and Ethereum (ETH) as a payment and would sell their newly created token in exchange.

Individual investors, venture capital and private wealth got involved and started buying BTC and ETH in order to participate in these new ICOs. In 2017, the demand for BTC and ETH soared, but there were only a few sellers and the number of tokens available on the market was limited to the amount the networks had produced. As the market is based on supply and demand, similar to the stock market, the more people sought BTC and ETH, the more the price rose. Projects that received the coins were not cashing them out — this was mainly due to the fact that the tokens were constantly gaining in value and the projects required these coins as they were in the process of being funded.

The age of private sales

Since the beginning of 2018, regulation started to become clearer in several jurisdictions. Although funding a venture by selling tokens without registering them as a security is still prohibited or very complex in certain jurisdictions, in others, it is now possible to do a token sale. In addition, the market has adapted to the lack of regulatory clarity and pivoted to being funded in private sales. A private sale is a direct contract between the company and the investor (in most cases an accredited investor). By negotiating a contract every time, investors now have an easy process to purchase the new tokens directly with US dollars or the currency that both parties agree on. What this means is that investors no longer need to buy BTC or ETH to be able to invest in blockchain projects through a token sale. They can now use US dollars directly which has impacted the demand for BTC and ETH.

The projects that were funded in 2017 and early 2018 have been gradually selling off their BTC and ETH. The main reason for this is that the projects need local fiat currency to pay for their development and running costs. As a result, this has put significant selling pressure on the market

A Macro perspective of the crypto market today

The large demand and limited supply of BTC and ETH at the end of 2017 led to a bull run in the crypto market. Now at the end of 2018, investors can buy tokens directly from their native fiat currency (USD, EURO, etc.) through a private sale. In addition, since projects are regularly selling their tokens on the markets. Both of these factors reduced the “flow-through” demand for BTC and ETH and increased the number of sellers. Now, their values have settled closer to what some may call their utility value. A value for BTC that is still higher than at the same time last year, prior to the bull run.

October 16th 2017 — BTC was at $5,741.25 USD

October 16th 2018 — BTC is at $6,588.98 USD

Source: https://coinmarketcap.com/currencies/bitcoin/#charts

Conclusion

Blockchain projects that wish to raise funds using tokens now have to be prepared with a white paper, strong development team, a working product, a viable business model and show traction or sales — very similar to typical ventures. The market got savvier and the new blockchain projects must be more prepared.

Exchanges are becoming more structured and regulated, giving way to new products being offered to retails investors and users. Exchanges such as Gemini, have created the GUSD, a cryptocurrency equal to the US dollar that is backed by a US dollar in their bank account. The GUSD can be transferred more quickly across borders for international transactions. This is an example of tokenization of an item into the blockchain system. Assets such as currency, stocks, bonds, futures, real estate, property titles, and contracts can be now tokenized and saved securely on a blockchain.

The market and blockchain technology are still in their infancy and more innovations are yet to come. Let’s keep an eye out for these leading-edge solutions rather than the specific flashy titles as seen in the news, which tend to focus only on a certain aspect of a much larger ecosystem.

*Special thanks to Yannick Folla for his contribution to this article.