Funding is a prerequisite for any new crypto project or startup. At the dawn of the new decade, we’ve seen a decline in token sales as source of funding. Where is the capital for crypto projects going to come from? Will traditional investment vehicles, like venture capital become more significant or will we see another evolution in crypto fundraising?
Ilias Louis Hatzis is the Founder at Mercato Blockchain Corporation AG and a weekly columnist at DailyFintech.com.
In 2017, ICOs were the most popular cryptocurrency trend. During that year 875 projects sold $6 billion worth of their tokens. In 2018, 1253 ICOs raised $7.8 billion, but 2019 was a completely different story. In 2019, we saw the introduction of the IEO. In total, token generation events during 2019 raised $3.2 billion (ICOs raised less than $370 million). But very few IEOs last year were able to raise a decent amount capital and only on selected exchanges. The drop can all be attributed to lack of regulatory oversight, a large number of exit scams, failed projects and delayed developments, severely damaging investor sentiment around token sales.
While the price of Bitcoin bounced back after the first quarter of 2019, the fate for most of the other coins, like Ethereum, EOS and Tron, was not the same.
The introduction of IEOs provided an extra layer of trust and security, when compared to ICOs. An IEO is very similar to an ICO. Investors receive tokens at a discounted price, in exchange for investment. IEOs are conducted on cryptocurrency exchanges, that claim to perform strict due diligence checks, to filter out any bad actors and protect their users. At a first glance IEO figures are impressive. The launch of BitTorrent on Binance in January ended in 15 minutes with over $17 million worth of tokens sold. But only a small number of IEOs have been able to get this kind of activity.
IEOs have their own share of problems and many are still skeptical. For the most part, IEOs were more secure than the conventional ICOs. While the IEO experiment showed that ICOs can be rebranded, it also showed that some of the inherent flaws couldn’t be evaded. As smaller exchanges, with more lax requirements, launched their own IEO launchpads, once again fraudulent token sales appeared
With declining ICOs and IEOs, blockchain startups are looking for other ways to raise money.
Even when ICOs were red hot, there was venture capital investment in crypto companies. Companies like Coinbase and Circle raised money from VCs. In 2018, VCs invested around $3 billion in crypto and blockchain-related startups, around 40% of what was raised by ICOs. In 2019, venture capital investment took a step back. By the middle of 2019, VC funding in cryptocurrency startups accounted for USD 822 million.
Security Token Offerings (STOs) have emerged as an alternative. While launching an STO is a complicated process, in 2019 they gained more traction and capital, with 64 STOs, collectively raising almost $1 billion. STOs were born out of the need to raise money in a more regulated way, while keeping the flexibility that tokenized assets offer. Only a few platforms are licensed to host STOs, but a huge surge in interest has led many to seek licenses. Because of this, 2020 will likely bring a new wave of STOs, though these will mostly only be offered to accredited investors, while a regulatory framework evolves.
We are also seeing another trend, the Initial DEX offering (IDO). Very similar to IEOs, IDOs are conducted on decentralized exchanges, instead of centralized exchanges used IEOs. Last year, Raven Protocol (RAVEN) conducted an IDO on Binance’s DEX. But for now decentralized exchanges still need to mature in terms of users and volume. For example, Binance’s DEX has a daily trading volume that is under $2 million.
When ICOs first came out, I thought they were revolutionary. The IEO model fixed some of the flaws that plagued ICOs and gave developers an effective and faster way to get to market. Even though IEOs started early last year with some fireworks, they did not completely resolve the trust issues, so the investor enthusiasm quickly fizzled out.
To make investors feel comfortable again, we need more than ease and accessibility, that ICOs and IEOs offer. We also need to offer IPO-grade regulation and compliance. But most startups are not able to do that. So what’s the middle ground? Well, maybe the solution is STOs, tokenized securities that comply with regulations. But for now STOs are still a hard route, that lacks liquidity and regulatory clarity.
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