Journalist and analyst Maxim Rubchenko explains why investors' interest in ICOs is declining and offers a solution to this problem.
The winter collapse of the cryptocurrency market not only scared off a lot of new investors but also caused a serious crisis in the ICO market. On the one hand, only either very self-confident startups or downright scam projects can afford to attract financing in cheap Bitcoins and ethers. On the other hand, the possibility of making a quick buck on the purchase of tokens during a presale or primary placement has significantly decreased. The hikes in the rates of coins after listing on the exchange are becoming more modest and shorter, and the risks that a newly emerged token will not survive to get listed on the exchange are steadily growing.
The situation that has developed in the ICO market today is eloquently described in a new study of the consulting company Satis Group, according to which 81% of projects turned out to be scams, 6% failed, 5% of ICOs were frozen, and only 8% entered the exchanges. Of the latter 8%, 24% to 47% were successful (depending on the size of the capitalization). In other words, only about 3% of all ICOs are successful.
Such a modest percentage of successful projects makes investors draw conclusions from their mistakes and improve approaches to the choice of tokens. If a year ago, investors were ready to buy any coins indiscriminately, then by the end of last year a standard had been formed, according to which it is possible to invest only in those ICOs, which besides having a white paper, also have an understandable roadmap, a qualified team, authoritative advisors and a real product at least at the level of a prototype or beta version. If two or three large companies also showed interest in the project, the success of investments was almost guaranteed.
The winter crisis and the increased level of risks made investors take the next step to start paying attention to the economy of the project, or a real business plan explaining how the project will earn money and thanks to which the value of the token will increase after listing on the exchange. It is possible to be ironic about the fact that buyers of tokens have only just started thinking about the economics of projects. However, let us remember that it took investors 5 to 6 years to grasp this simple concept in the dotcom story. That is, the ICO market evolves by an order of magnitude faster than the internet market of the initial period.
While the scheme "bought at a presale and sold after listing" worked, the primary factor in the success of investments was the PR activity of the project’s organizers. Now that buying tokens during the ICO has become too risky, it is time to start assessing the outlook for the token for its entire life cycle. That is, engage in economic analysis of projects.
The analysis of the economic efficiency of the project is a rather complicated procedure involving the evaluation of such parameters as the payback period, the return on investment taking into account the change in the value of money over time, the relationship between the project participants and their economic environment, the risks associated with the project, and so on. ICO investors simply do not have the information to do this, as the white paper format does not provide for anything like this. Therefore, the whole analysis boils down to finding the answer to the question: why would someone need this token in real life in the first place?
The first benchmark here can be a survey conducted by DeCenter. Investors were asked which tokens they consider the most promising. 41% of respondents considered such coins that grant the right to purchase goods or services. In second place (19%) were tokens giving points in loyalty programs. The third and fourth places were occupied by coins in games (13%) and personal tokens of popular people (10%). The top three outsiders were tokens serving as community currency (7%), giving votes in systems or providing bonuses in companies/projects (5% each). From these figures, we can conclude that the maximum chances of "take off" belong to the coins that can be used as a medium of exchange since they are the ones that evoke the greatest liking of investors.
The next step is to estimate the scale of the project proposing the purchase of tokens. A significant share of all ICOs belong to sectoral or even niche projects, such as coins for the gaming industry, for producers of organic food products, for wholesalers of flowers and so on. There are also regional projects involving the use of a token as a local currency.
The small-scale or narrow specialization of a project becomes a severe limiter for the growth of token rates as the tighter the circle of token circulation, the fewer chances it has to rise in price on the exchange. If the project belongs to a narrow sector, and you do not understand what its main feature is, then many other investors will not understand it, either. Hence, the demand for the coin will be low.
Another obstacle to the growth of the value of a token is competition. Ideas are in the air, and most ICO projects have "twins." Co-founder of Ethereum Joseph Lubin is sure that most token sale organizers simply copy other people's ideas. Copying or not, but there are more than enough similar projects and tokens on the market. On May 16, the launch of the OneGram is scheduled in the UAE. This token is secured by gold. In the summer, the Swiss raw material fund Tiberius is going to launch its own token, the tcoin, all secured with gold. And this is despite the fact that the market already trades two "gold" coins, the Goldmint and DigixDAO.
Analogs appear even when it comes to revolutionary and breakthrough projects. Right now, two projects aimed at the organization of an air taxi system on blockchain are preparing for their ICOs, the McFly and Vimana. And both are from Russian startups. If you believe in the idea of flying taxis and the potential of the domestic aircraft industry, the most reasonable solution will be to invest in both projects equally. All because it is impossible to determine which of them has the greatest chance of success. In this case, the projects will detract each other's investors, which will slow token price rates for McFly and Vimana. However, having two similar ICOs at one time is quite a rare situation. Most often, when deciding to buy a token, you can find coins of a similar project on the exchanges, look at the dynamics of its rates and draw conclusions about the prospective profitability of investments. This means that each new analog has less chances to attract investors than the predecessor project, but at the same time the leader loses some of the potential investors.
Finally, the main limitation for the growth of the value of tokens is that even if the coin is launched as a means of payment for a particular product or service, the project organizers will have to accept payment in fiat currencies. Otherwise, the client base will be too meager, as the vast majority of people still treat cryptocurrencies with distrust. That is why no white paper contains any mention that the token will serve as the sole and exclusive medium of exchange for goods or services offered by the project.
That is, to purchase a product or service, it is not necessary to risk buying a token on the exchange (and paying a solid commission at the same time). You can wait for the project to start working in full force and then pay with fiat money hassle-free. This is the main problem of all ICOs and the main limitation for the growth of the value of tokens.
There are no simple and obvious solutions here. It is clear only that the organizers of ICOs need to increase the economic attractiveness of the possession of tokens. Investors should be offered some bonuses, at least in part compensating for the many risks and costs for commissions that have to be paid when buying tokens on the exchange. Perhaps, this should be done in the form of dividends, on which the percentage of the total profit of the project will be spent. Some crypto exchanges already pay dividends on their tokens. Perhaps, large investors need to be given the opportunity to participate in resolving issues related to the development of projects. In other words, the token, remaining a means of payment, should increasingly resemble preferred or voting shares. It is this path that will ensure that the coins of ICO projects turn into a fundamentally new high-grade class of investment assets.