They were the darling of the 2017 cryptocurrency euphoria. Initial Coin Offerings (ICOs) were in the vouge and there was a coin for everyone and every purpose.
Fast forward to mid-2018 and the landscape is quite different. There has been a collapse in the number of ICOs that have tried to raise financing.
This has been driven by a number of factors including uncertainty around regulation, falling crypto market prices and of course, disillusionment in the previous ICOs that raised funding.
Given that the Ethereum blockchain was the premier platform for ICOs to raise their funding, it is feeling the brunt of this slowdown.
Not only is this lack of “ICO demand” for ETH having an adverse effect on the price but the previous ICOs are also driving the price lower as they try to convert their ETH into Fiat currency to meet expenses.
In this post, we will take a brief look at how both the demand and the supply side of the ICO equation is impacting the price of ETH.
The Demand Side
Last year ICOs were viewed as an easy way for a start-up to raise a lot of money in a relatively quick period of time. Why raise $100-500k through traditional VC means over a period of a couple of months when you can raise $30m+ in a few days through a crowdsale?
Many blockchain based projects thought as much and the ICO boom began in earnest. They were unregulated and were beholden to no one. Of course, this was an invitation to steal which is many ICOs have done.
However, things have changed now. Apart from the fact that investors are more skeptical, the regulators are on top of ICOs with the full force of the law behind them. There have been many projects that have been served cease and desist letters as well as some that have been prosecuted.
This is the landscape that many blockchain projects find themselves in today. This has had a sizable impact on the number of projects that have been raising funds through ICOs. Take a look at the below chart which has the total amount of funds that have been raised over the past few months.
Total Amount of funds raised by ICOs over past year. Image source: ICO Data.
As you can see, there is a clear downtrend in the data. Blockchain companies have either decided that the ICO funding route is no longer worth it or they are trying to raise funds and are not meeting their minimum raise amounts. Indeed, it could even be a combination of both.
ICOs are no longer in the vouge and as a result, the demand for ETH to buy tokens in the crowd sales is likely to have fallen. This means that large-scale retail buying of ETH on the exchanges is not as prevalent.
Prices could have remained stable if we were to assume that supply is constant. However, this is most definitely not the case.
The Supply Side
The ICOs that have been raising money over the past few months have to meet development costs. Although ETH can be used for a number of things, the bulk of the costs of running a start-up are in fiat currency.
Hence, these projects would have to have converted the bulk of their ICO pot into fiat currency. If they did not do this then they should at least have hedged their positions with derivative instruments and locked in the value of their holdings.
At least that is what they should have done.
It is becoming increasingly clear that many of these ICOs had expected the price of ETH to continue to rise. They decided to forgo the opportunity to cash out their funding in order to participate in future movements.
This shows bad Asset / Liability management principles on their part and has resulted in them getting caught off guard with the fall in the price. This has led to a sort of self-fulfilling prophecy as ICOs panic that other ICOs are selling and crashing the price.
Spent the morning with an ICO (not to be named) they raised $30m usd with a solid roadmap, they raised when ETH was $1200. They panicked and sold their remaining ETH last night – they have $4m left.
— Ran NeuNer (@cryptomanran) August 8, 2018
It can be considered an interesting case of a prisoner’s dilemma. In total, all of the ICO projects will benefit by not collectively selling. However, if you are the only ICO that does not sell, you will be left with an ETH reserve that is greatly reduced.
You can monitor the amount of ETH that is leaving the ICO wallets on the SANbase database. In the past 30 days, we have seen a total of 133k ETH that has left these wallets. While some of these funds may be moving into other wallets that are controlled by the ICO, it is likely that a large proportion is being moved to exchanges for a sale.
What Does this Mean for ETH?
The fall in the price of ETH is not going unnoticed. Vitalik Buterin, the founder of Ethereum, took the time on twitter to lay out exactly where the upcoming Casper protocol update was.
1. Today I am going to make a tweet storm explaining the history and state of Ethereum’s Casper research, including the FFG vs CBC wars, the hybrid => full switch, the role of randomness, mechanism design issues, and more.
— Vitalik Non-giver of Ether (@VitalikButerin) August 16, 2018
This is the much-hyped Ethereum Improvement Proposal (EIP) that could see the coin move to a Proof-of-Stake consensus. Many participants saw the tweet as a move by Vitalik to shore up confidence in Ethereum’s long-term roadmap.
So, while the impact of ICO selling could persist throughout this bear market, there will eventually come a time when the “panic” will cease.
If development is to continue and the updates to the network are successfully rolled out, institutional and retail demand from Ethereum could pick up again.
Hence, in the short term, it is entirely likely that the ICO phenomenon could still impact on the price of ETH. However, in the medium to long-term, the focus will once again pivot to the technology.
Nic is an ex Investment Banker and founder of the Coin Bureau. He has worked on numerous online businesses and is passionate about cryptocurrencies and decentralised technology. You will either find him a behind a collection of screens while trading Bitcoin, or in the basement maintaining his mining rigs.
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