By Crypto Arnie on ALTCOIN MAGAZINE
In this article — I discuss the Death of the ICO Market, Transparency Issues in the ICO space, The Gamification of Influence and where next for 2019.
In the beginning of 2018, the birth of the bear market witnessed sharp declines in the price of alts across the board. Many investors continued to invest throughout the first few quarters of 2018, in the hope that, with careful planning and meticulous analysis, sniping the projects few and far between which would hope to bring short term profits would continue.
Summer 2018 for many funds and VC’s marked the start of a six-month stagnation period from the end of Q2 to Q4, in investment into ICO projects and companies, with the market fully saturated in almost every field, projects were beginning to struggle to raise capital, gain community traction and find support with affordable services and listing costs.
One of the most notable projects in the later part of 2018 was Fantom, a highly speculative Korean Project, entering the investor space with over 30 crypto VC backers. Fantom’s mechanics were designed in such a way that, the ordinary crypto enthusiast and avid crypto ICO investor employing the strategy of ‘flipping’ found it very difficult to gain allocations into the project. This created a huge secondary market premium giving instant liquidity to VC investors with zero downside risk. Despite Fantom’s highly anticipated launch, it failed to live up to expectation with sub-par listing. The token price almost immediately dropped on listing, marking one of the first major failures in what seemed to be a bullet proof strategy of investing.
Nobody really knows why Fantom did not list on higher tiered exchanges. It was strange, even now thinking about it, with their Crypto VC investors and backing, it seemed a given that Fantom would list on better exchanges, thus providing more confidence and better liquidity for investors. This one really stumped me. Myself and others well embedded in the crypto space were also being given signals that better listings were arriving, yet this did not materialise. Were we being lulled into a false sense of security, or is there a greater strategy in play by high level operators, VC’s and exchanges?
What is clear is that lack of success around Fantom, determined by many factors such as weak Lock Up Mechanics for a bear market outlook, high premiums and high initial circulating supplies, marked a clearly worrying 6-month outlook for ICO investors.
This trend of failure by highly anticipated projects continued, next with Aergo. Another Korean project, with many Crypto VC investors behind the project, with a solid foundation and a strong development company behind them, Aergo failed to live up to the expectation of the Project and Aergo Investors.
Just how devastating the market conditions are, can be examined in how the Aergo Token Release Schedule was reduced down to a 10% initial release. Even so, the project failed to maintain the private sale prices and now sits below 0.07 cents, around a 70% price decrease for original investors still holding on. Even though the lock-ups were changed for original investors, the team did not reciprocate the move, maintaining the same lock-up before. Tokens reserved by the team would essentially be liquid before the bulk of tokens were received by investors. Projects similarly changing lock-ups on investors; Quarkchain, Edenchain…
One of the most over bearing factors for investors to consider is the issue of lack of buying pressure for these project tokens in the bear market. If the selling pressure is as much as 2:1 — investors should expect token prices to drop dramatically on exchanges.
This raises the question about the viability of ICOs in the given market conditions. ICO’s simply cannot produce a return to investors through the classic ICO model.
There are other questions coming to the forefront of discussions by ICO investors around transparency, portfolio management, valuation and such. Clearly, the old model of ICO investing is broken and gamified beyond repair.
Transparency remains a problem in the ICO space. We continue to see companies raise funds and change their lock-ups after finishing investment raises, with little recourse available to participants and less available to those who purchase over-the-counter.
How projects employ treasury management is also crucial. Many projects lack treasury management, and often gamble the entire value of their total raise while holding it as a volatile currency like Ethereum or BTC, leaving them with substantial exposures to the US Dollar value price fluctuations of the market. Running companies in the Crypto/Blockchain space is expensive, services are valued at a premium, as are developers and consultants worth their salt. Companies that don’t employ treasury/portfolio management often end up liquidating their entire investment raises at the bottom of the market, which we have witnessed, increasing the risk of start-up failure due to lack of capital to operate.
It’s often little too late, and executive decisions are made by CEO’s and founders with little market or trading experience, in what is essentially a trading decision.
Many of us have seen or heard tales regarding projects dipping into tokens which are supposed to be designated for long-lock ups, often concerning team/foundation or advisory token distributions. Due to the lack of transparency, there are projects breaking these “promises”.
These are nothing but promises made to be broken, as investors have no legal right or recourse over decisions that the projects make which is something afforded to equity investors in the world of regulated securities. Perhaps institutional investors place conditions on token releases, which some Crypto VC’s and funds do stipulate, but it is far and few between and there is no real way of holding companies to account.
In my experience, when companies do cross the line, their VC and Fund investors are very cautious to make sure the issues are contained so as to not harm their investment, as it could cause retail investors to stampede through the exit. Have I seen examples of this personally? I have, and it’s very interesting to see the ecosystem in which these companies operate in and the same key players involved in investing in ICO’s and also maintaining their advantage over retail investors through any means necessary.
What are the solutions available for the community?
Regulators across multiple jurisdictions have made clear guidance, as is the case in the United Kingdom, with guidance of ICO and STOs being published under one week ago, it clearly states that ICO’s will not be regulated products. Retail investors won’t be protected in the same way as securities are. Thus, how do we clean up the crypto space, and how do we do this ourselves?
Self-policing is the only option left. A standard set by investors and the wider community that requires companies to publish full accounts of wallets and addresses, with every token from every advertised token distribution, from founder and team tokens, to advisory tokens is a potential solution to stop soft-fraud in the ICO space.
By publishing full accounts of tokens held by projects, this allows investors to track the flow of tokens. Of course, there has been resistance to this already by companies, as the consequences of such measures will lead them to being unable to access liquidity and sell company tokens earlier than outlined, unless they were to do so in plain sight of the community.
Those behind the companies may complain that such strict measures in place cause higher risks in the start-ups failing — that companies should be able to ultimately make executive decisions for the “greater good” of the company. I would disagree here, if such measures were genuine, you could always put a proposal forward to your investors and allow them to vote.
As an example of democracy within the ICO space, PundiX employed something similar with their change in the way ‘staked’ token holders were rewarded. In order to stop gamification with people buying and selling just seconds during the chain snapshot, PundiX allowed investors to vote with 0.1 NPXS to change the lock-up to be a 30-day weighted volume average. Investors that were holding tokens across an entire month period would benefit the most from the monthly token releases.
As an example of purely corrupt behaviour, I have spent time with CEO’s of top blockchain projects which raised capital, publicly promising investors that there were lock-ups on the team and advisor tokens, only to find out that their main seed investor, was an advisor and liquidated a $500,000 USD stake worth of tokens within the first hour of trading — the project has never recovered in price since.
With this standard of transparency in mind and demanded from the outset, projects that do adhere to higher levels of transparency should be rewarded with recognition by a voluntary self-policed body of investors, which are able to remain partisan and unbiased, which would work to protect investors.
Flaws in such an initiative will always be present, the intra-politics between gatekeepers, the economic incentives available for favouring projects, bias employed by custodians, it would none-the-less be a great step forward in clearing up the opaque practise behind ICO’s.
The Gamification of Influence
Influencing is not new. Everybody has their favourite crypto characters that they avidly plug-in to for the latest news or opinion, but sometime during the ICO Market boom, influencing became extremely profitable. Companies identified that influencers have large followings and vast amounts of good will. Good-will, when mobilised, could lead to retail investors buying tokens in from their companies.
It makes sense to therefore employ influencers to promote your initiative. Herein lies a problem, when influencing is so lucrative, that you no longer need skin in the game.
Companies are willing to pay 6–7 figure sums upfront if you promote their projects. Promotions in the form of tweets, blogs, AMA’s, advisory, attending company events, even pictures with said influencers. Why?
Some influencers have huge exposure in the market, without their support — companies will never gain traction in the sea of noise, where thousands of similar projects are racing to get off the ground.
The subject of influencing is controversial, complicated and also morally compromising. How far should an influencer go in promoting a project? They have inherent biases due to being paid huge sums of capital, how far should influencers go?
This led to the trend of influencers gamifying the ICO market, often working together in order to collaborate on promoting a specific project, in tandem with affiliated Crypto Funds and VC’s which would connect projects to influencers in order to promote company.
It’s a huge business that I have seen first-hand in the crypto-space, often feeling quite uneasy about it, with companies managing ‘influencers’, behind the scenes, on their books and you (a company) being able to ‘rent’ them out for substantial payments.
Your favourite influencer does paid promotions, not always disclosed either. It should make any honest person feel slightly uncomfortable in the fact that you may be promoting a project that you personally would not invest in, yet while they promote it to fan-base of investors so that they invest.
Nobody really wants to illuminate what takes place here, and you won’t see other influencers doing it, because would be a contradiction, right? Sometimes you see influencers ‘in-fighting’ publicly, as influencing bases shift from one to the other, those on the losing side need to fight for their audiences back.
The other side of the story is that being an ‘influencer’ or public figure in the crypto community can be very expensive. It’s extremely resource intensive. There are many costs involved, software fees, video editing, travel expenses, equipment ect. Maintaining an active platform does incur a substantial cost. Therefore, balancing the expenditure of operating versus spectrum of promotion is difficult. How far should influencers go in promoting?
Everyone has their own approach and their limits on how far they will go, but ICO investors should be very clear, that influencers are paid to promote — this should factor into your analysis of a project and often not always results in a positive effect. Personally, assess influencer support/backing as a negative metric in the bear market, as it attracts investors looking for the largest discounts and immediate liquidation for profits on exchange — Purely a short-term outlook.
As the bear market crisis extends into 2019, more influencers will consider taking paid promotions in order to survive, naturally. It’s just important that you know they are paid to do so.
A Hard Truth about Valuations
At the heights of the ICO Market, valuations reached astronomical figures, up into tens if not hundreds of millions of dollars. We could not be further along in history today. Companies are still trying to raise millions of dollars for ideas, concepts and whitepapers. Today, there has been some complexity and sophistication added to the project proposition but in reality, many projects are recycled from past ideas. It’s important that investors know that there are development companies that are effectively “reselling” blockchain tech, such as smart contracts, wallets, platforms, websites and so on. While stating this at some considerable risk to myself — Investors deserve to know this.
There is little intrinsic value in many ICO projects that will simply purchase blockchain tech from a few handful of elite developer companies that actually develop the tech for many projects, at a fractional value compared to the their hard caps. White label blockchain solutions.
ICO hard caps should not be more than $10 million — fully diluted. This is on the far end of the spectrum in extreme circumstances. The reasoning behind this; these projects simply do not need such huge amounts of seed capital. ICO raises should be treated as a pre-seed/seed or pre-Series A equivalent.
Why? It’s simple to understand, investors are getting almost no guarantee of anything substantial in the project, hence the rise of the utility token. In traditional fundraising, a company gives away a small amount of equity based on a valuation of the company. Valuation is based on a myriad of factors, having just an idea or concept comes at the bottom of that assessment. The earlier in the lifespan of the company, the lower the valuation. This way investors get a good chunk of equity on their investment, at the riskiest stage in the company.
Projects are now moving on to selling equity post-ICO, after raising tens of millions of dollars. There is no real need for them to be selling equity, however, with huge cash-assets available to be splurged on the balance sheets, pushing up the valuation from a classic x4-x9 model to a x20 crypto valuation based on future profit streams (invented out of thin air and based on an imaginary ecosystem of millions/billions of users) plus (+) a huge cash asset balance, maybe then it’s a wise time to start raising more funds via selling equity in a Series A security offering if you are a CEO in this position. VC and equity investors are more likely to invest in a company perched on a stockpile of cash at 0% interest supplied by ICO retail investors.
Is this just a way for the traditional market to abuse retail investors? In a bear market situation, it certainly feels amplified.
It just goes to show that, ICO investors really get the worst end of the stick. We could be hopeful and say one day, a company decides to convert all ICO tokens into Equity, but this is highly unlikely and laden with regulatory issues.
Where next for 2019?
As the market starts to consolidate at new lows, trying to find a bottom. ICO investors need to gain a new perspective on investing. As long as there is no change in culture, there will be no progression made. Retail investors should be setting higher standards for which honest projects and companies feel comfortable to meet. In reality, this mean’s lower valuations, lower hard caps, stricter lock-up schedules for early investors, lower block sizes of allocation for VC investors.
Expectations need to be moulded to a reality that fits the current market. I personally would not be investing in projects with hard cap valuations over $10 million (USD), as these companies have very little to offer compared to Series — A equity investment opportunities in the Fintech world, or blockchain related companies that have no use for a utility token.
It simply makes no sense. Yet, that is a market that is difficult to access for the ordinary person and epitomises the capitalist economic system we live in.
Security Tokens are being heralded as the next big thing. At the beginning of 2018, in January, I started to take a deep dive into equity and security offerings, the regulation, compliance and valuation models behind start-up investing (essentially).
I travelled to different countries, interviewing some of the best, cutting edge developers building the tech to bridge the STO space to the stock markets, interviewing founders and leaders grafting the regulatory guidance, like classifications of assets in Crypto, with regulators and also got a sneak peak into some of the best STO platforms in development (the non-public ones were very exciting).
The list of companies lining up in principal to initiate a Security Token Offering, is quite incredible, household names and long-established brands in discussions with equities and securities experts from the old-world, signing contracts to raise investment via STO’s in 2019 and 2020. There is a huge opportunity but navigating the difficulties and dangers will be complex.
These companies were in a minority and hidden away from the ICO/Crypto space. The quality of offerings as a whole, is very sub-par, and with the ICO space being saturated, it will remain saturated in the STO market too, the only given difference is that you’ll be getting a legal right with projects (equity) in companies, often very similar to what we are all familiar with investing in.
I personally do not believe that STO’s will be the magic bullet that some are claiming, but I have gained huge insight into the inner workings of financial markets with the help of current and former experts across the world.
My next articles will be an in-depth explanation of how equities and securities work and some of the traditional and hybrid models of assessments work which are employed by traditional venture capital firms. Some of the pitfalls for investors when it comes to equity investment and how to dodge bullets and preserve capital by using a framework.
Our cohort of investors will inevitably evolve into equity investment in start-ups — A completely different world to the ICO space, fraught with its own complexities, issues and dangers — and I am starting to find, a lot more difficult to navigate.