ICOs: The Must-Knows
My ICO pick of the month for 21 Cryptos Magazine was STK - a rare, genuinely good project with a real chance of long-term success. Unfortunately, the ICO was cancelled for an airdrop and many readers were saddened to find out they could not invest. In effort to make up for this unfortunate turn, I tried to make a new ICO pick of the month. However, after spending more than a dozen hours rapidly researching every single ICO that recently launched or was launching this month I came to an abrupt conclusion. They were all horrible – not a single one came close to meeting my check-boxes. Not one project met my base criteria that would make it deserving of recommendation. I would never in a million years promote a project that I did not believe in and I would especially never promote a project which I would not personally invest in. I say this with a heavy heart, but there is not one project worth investing in for the entire month of January – I am sorry. After a lot of soul searching, I concluded that STK was the pick and I could not in good faith recommend any other ICOs this month. Instead, I wrote the following article to be a guideline towards thoroughly understanding the initial coin offering space itself and to give context to just how much everything has changed and what you really must know.
The Dreams, the Fantasies, the Myths
It is no wonder that people continue pouring millions of dollars into ICOs. Just look at the money you could have made investing in the ICO of Ethereum back in 2014 - $100 would be worth $363,000 today! Or, how about the ICO of IOTA in 2015 - $100 there would be over $44,000 now. Not too shabby. That is to list a few of many – but what do all of the biggest gainers and greatest success stories in crypto have in common? They were the first of their kind. People who invested in these ICOs are referred to as “early adopters” – the early adopters in every major trend throughout history have made fortunes. However, it is because of these overnight fortunes that the fear of missing out sets into the general public with the promise of quick cash. Standards are thrown to the wind, money is moved around frivolously, and things get out of control. Historically, this has led so many to lose everything and we must be cautious when approaching these investments today, because otherwise history may repeat itself. I am not by any means saying you should stop investing, I am simply saying that you should be aware of the state of the markets you are investing in. Below is everything you need to know about what the ICO market was like when it started, what has changed, and what we can expect in the future.
The ICO’s Rise to Prominence
The ICO did not gain prominence until late 2016. Since then, the ICO market has risen drastically. You only have to go back seven months to see just how fast things have changed. Take a look at the graph below. At the beginning of April 2017, the total amount of funds raised through the ICO was a mere $330 million. Today, that number today is over $4 billion. In eight short months, $3.7 billion has flowed into more than a thousand projects. What are the odds that each of these are successful now? Compare this to the golden age of ICO-investing back in 2016. Projects were unique back then, requesting barely a few million dollars, valuing their innovative companies and concepts at less than ten million. It was rare for an ICO to raise more than $5 million, it was newsworthy for that matter! Today, a $5 million-dollar ICO is considered a dud and they are selling a third as much of the tokens.
During the golden age of ICOs, seeking out new projects was a fun and exciting task. It was far different then as compared to the commercialized landscape we see today. In the early days, projects took much, much longer to go public – often waiting two full years after their announcement on bitcointalk before launching an ICO. Nowadays, people announce their projects and start their ICO the next month. Of course, there are reasons for that though – back in 2016, there was a lot less money going around. Projects needed to prove themselves more to the community first in order to raise sufficient capital. Founders knew that the only potential investors were crypto enthusiasts who were all highly knowledgeable individuals that would never throw money at just any project. However, that is no longer the case now that companies know they have access to a far broader potential investor group.
The Commercial ICO
There is a stark contrast between the olden days and the commercialized ICOs which we have come accustom to. With so many new investors flooding the markets, each having little to no experience in the industry, many are exploiting the knowledge gap and attempting to grab as much money as possible, as fast as possible. We already began witnessing this last year and we can only expect 2018 to be worse. There are too many opportunistic scum bugs out there trying to steal your money – they will make grandiose promises, set unattainable goals, or will go so far as to promote the potential gains you can expect from investing in their ICO. Those are hardcore RED FLAGS! Avoid projects that show any of these flags all costs, they are unnecessary risks – especially if they try to promote how much money you will make by investing, that is basically the first page out of the conman’s playbook.
ICOs have changed and it is incredibly important to recognize that. Projects used to have purpose – each was unique, had already undergone significant development, and set out to achieve huge but relatively realistic goals of revolutionizing multi-billion-dollar industries. These things made ICOs terrific investments – especially considering that back then, it was rare for and ICO to offer less than 85% of its tokens for the public sale. (Projects only sell around 33% of their tokens today – keeping 4-5x as much for themselves)
Crypto projects are beginning to look a lot like Silicon Valley tech startups – where there are a hundred companies competing to make ever-so-slightly different versions of calendar apps in the hopes of raising millions of dollars because their interface is “more user friendly!” Cryptocurrency has entered a level of saturation and competition that we are beginning to have to act as mini venture capitalists – except we don’t have Harvard degrees, decades of experience, and don’t do hundreds of hours of due diligence before making investments.
How to protect yourself
Be aware. Know how dangerous the markets you are investing in truly are. Learn from the past and do serious due diligence. Ask these questions: How strong is the development? Does the website promote a powerful image of professionalism and portray the team’s ability to follow through with a strong work-product? (Anything below spectacular and awe-inspiring is an automatic pass) Are the founders real people with applicable work histories or are they ghosts with no prior experience and nothing to show for themselves? How much competition is there in the space? What are they doing different? How long has their project been around – are they brand new or have they been at it for a while? Are they active with the community, how many pages of discussion is there on bitcointalk, (50+ pages should be about minimum) and how often do they make blog/twitter posts? How much are they valuing themselves at? (Ex. An ICO is selling 33% of its tokens to the public and sets a $15 million hard cap on the sale – That means the project is actually valued at $45 million) Then ask yourself … are they really worth $45 million at this stage? But perhaps above all else: Do you actually see the project rising in the long-term, do you really see people using it someday, do you see it materializing – beyond the promises and the dreams, when you really dig, can you actually envision a path forward. If you cannot, then run.
Precedent: The railways of risk
Initial coin offerings have undeniably offered some of the greatest investments of all time. Unfortunately, today we are seeing an oversaturation of these offerings. ICOs are attempting to fill increasingly small niches, performing very specific tasks and offering little functionality. In many cases, the markets are either not ready to adopt cryptocurrency or there just isn’t much of a market at all. But nobody wants to be left out. New investors think ICOs are gold mines, that investing in them will turn them into overnight millionaires. However, these new startups are offering unrealistically high expectations and are subsequently valuing themselves far beyond what they are worth, but yet people continue to invest.
The issue of ICO oversaturation is very similar to that of the early 19th century English railways. However odd the topic of railways may sound, it is actually very applicable precedent that can help us understand what we are seeing today. When the first railways were built during the industrial revolution in the early 1800’s, they were immensely profitable ventures, often yielding 1000x returns - much like Ethereum. Railways were the future in 1840. They were arguably one of the most significant advances in technology at the time. The railways connected people like never before, there was no telling how much money people were going to be able to make in this new era of technological advancement. It didn’t take long for speculation to get out of hand. Six years into the railway mania many had made and lost fortunes investing in railways that connected smaller and smaller towns.
The growth of the railways was unsustainable, but that didn’t stop the influx of investment that came during the period between 1840-1846. The Railway Mania became a self-promoting cycle based purely on over-optimistic speculation. The problem began as a result of the British government’s almost totally laissez-faire system of non-regulation in the railways. There were no limits on the number of railways and no real checks on the financial viability of each new line. Because of the lack of regulation virtually anyone could form a company, gain investment and begin development. New investors were constantly drawn in by the opportunity to invest in the ever-expanding railways because of stories about how immensely profitable other ventures had been. The Leeds and Selby Railway was one of the first ever built, having connected two major cities it served as a major hub for interstate commerce and generated huge profit. However great the investment may have been early on, railways between major cities had all been developed by the time the general public caught on. New railways popped up between smaller and smaller towns. The unviability of these miniscule use railways became clear, investors began to realize that the railways were not as lucrative and as they had been led to believe.
It may seem like a fairly “out-there” comparison at first glance, but if you really look at it, cryptocurrency is shockingly similar to the 19th century railways. Early investors in cryptocurrencies like Bitcoin and Ethereum made fortunes because the technology was new and they were able to seize huge market opportunities by addressing the large needs first. Bitcoin was the first truly anonymous and decentralized digital currency, it still serves as the anchor for the industry today. Ethereum came along shortly after and leveraged blockchain technology to its furthest extent, enabling smart contracts and decentralized application development. These two famous cryptocurrencies came very early and filled extremely large needs in the market, yielding massive returns for early investors. But these investors came long before the general public had caught on to cryptocurrency. Crypto didn’t start taking real mainstream investment until 2017. At this point, most of the major infrastructure has already been developed and new crypto startups are setting out to build increasingly niche blockchains that nobody really wants nor needs. It is just like the railways that attempted to connect two tiny little towns and somehow expected to make the same profits as those that connected the largest cities in England.
The railways made a lot of people rich, getting there first was certainly a major advantage. But people are inherently irrational and greedy, after seeing others make so much money, they wanted their share. People like this lost everything. It is a cautionary tale for us all. Although cryptocurrency may be new and it still has room to grow, be careful of ICO’s. There are a lot of great investments out there, don’t get too caught up in the hype. Make sure you properly evaluate whether or not the cryptocurrency you are hoping to invest in actually has real potential or if it’s just trying to leverage the overly-optimistic speculative state of the markets.
Be aware of our history, it is human nature to make the same mistakes. However, if we are vigilant, we can learn from the past and make ourselves a brighter future. There are still good ICOs to invest in – but finding them requires much more work and proper due diligence. Know the red flags of scam ICOs and get-rich-quick schemes. As long as you can cut out the unnecessary risks, you can still be successful in these markets.