Value of Initial Coin Offerings market breaks through $4 billion barrier

29 January 2018 Authored by Consultancy.uk

According to a new report, the total value of Initial Coin Offerings has breached the barrier of $4 billion globally. While the notoriously volatile value of the likes of Bitcoin has broadly risen, however, a number of factors could see the cryptocurrency bubble burst in the near future.

An initial coin offering (ICO) is a means of crowdfunding centred around cryptocurrency, which can be a source of capital for start-up companies. In an ICO, some quantity of the crowdfunded cryptocurrency is pre-allocated to investors in the form of "tokens," in exchange for legal tender or other cryptocurrencies such as Bitcoin or Ethereum. These tokens become functional units of currency if or when the ICO's funding goal is met and the project launches.

In recent years, cryptocurrencies have received a growing amount of hype across the financial services and consulting industries. Thanks to this, top firms have garnered a level of perceived thought leadership on the matter, which has subsequently seen a glut in cryptocurrency-related interest for consultants. Big Four rivals Deloitte, EY, KPMG and PwC have each indicated that they were receiving increasing interest on the topic, with the firms confirming to the press that new conversations with "wealth and asset managers" had taken place, on how they can begin managing cryptocurrencies and ICO tokens – though PwC took a much more cautious tone, with Ajit Tripathi, a Director of FinTech and digital banking at ‎the firm stating, “While the potential of ICOs in terms of transforming venture capital is indeed exciting for many of our clients around the world, the lack of regulatory clarity, particularly in the US, remains a concern.”

ICO market

Indeed, others are pointing to the lack of pertinent regulation, which is conversely one of the biggest draws for present investors in ICOs, as a roadblock that is preventing newcomers from capitalising on the offerings. That being said, a number of high profile global businesses have still taken the risk to associate with ICOs. Notably, this recently saw British football club Arsenal promote an ICO, with the Gunners partnering with an American gambling company to promote an ICO worth a potential $70 million. While such a figure might seem pie-in-the-sky, the ICO market is booming at present, with the total amount of funds raised via the technique boasting twice the volume of traditional venture capital investments in Blockchain projects.

US, Russia and China lead

According to new research from EY, the funds gathered by ICOs have fast approached $4 billion since 2015. The amount has technically surpassed that milestone already, however $0.4 billion of those ICO proceeds are sourced from companies registered in China, and must be refunded to investors. EY’s data is based on open sources, and as the ICO market is not regulated, with no standardised reporting in place, ambiguity is high. Therefore, this figure could be substantially higher, with some organisations claiming nearly a billion dollars were reportedly returned to sources in mainland China. This followed investors in the region putting money to work in some 40-plus ICOs, before China's central bank banned ICOs on September 4th 2017, and later banned all Bitcoin exchanges.

ICO projects by country

Before the dramatic decision from China’s central bank, the mainland had become the fourth largest ICO market, hosting 156 ICOs, though this was four less than Singapore. Most ICO projects originate in the US, Russia, Singapore and China, though the US is by far and away the largest centre for such projects. American ICOs drew over $1 billion, a quarter of the global total, with Russia a distant second, with $310 million in funds raised. Just inside the top 10, meanwhile, the UK is the ninth largest market for ICOs, having raised $145 million.

In terms of market capitalisation following ICO projects, the largest gainers are currently Ethereum and other Blockchain infrastructure projects. Ethereum has seen value grow to a size of $69.2 million, compared to Blockchain projects more generally, which have amounted to a solid $7.5 million. Blockchain has increasingly been heralded as a game changer in terms of online transaction security, and has also been touted as a useful addition to many production chains, such as in the food industry. The broader capitalisation of the ICO market meanwhile booked a phenomenal $90 billion value.

Risks in ICO market

Despite this meteoric rise, the ICO market faces significant challenges in the coming months. First, as most markets eventually do, ICOs will have to consider what will happen when the market reaches saturation, and begins to struggle to find ways to continue growth. This point may come sooner, rather than later, though, as although ICOs might still be considered in their infancy, the number hitting their funding goals is falling.

Growth in projects’ capitalization since ICO

In November 2017, fewer than 25% of ICOs hit their targets, compared with over 90% of those in June of the same year. Since late 2017, ICO volume has also been slowing down, and while the number of projects reaching fundraising goals could, in part have taken a knock from the notoriously volatile nature of cryptocurrency itself, it could also indicate that the market is reaching a point where it will have to contract, and where the bubble may burst.

Volatility may further hamper the ICO market soon. ICO valuation is often based on “fear of missing out”, as opposed to project development forecasts and the nature of token being used to make informed investment decisions. This is in large part thanks to projects trying, with questionable ethical intent, to attract investors by introducing Blockchain in new markets via white papers containing clichés aimed at attracting inexperienced investors.

These investors often have no reasonable justification for Blockchain use, besides jumping on a bandwagon, and are easily influenced by buzzwords. The most commonly used of these, according to EY, include; meaningless platitudes including “next-generation platform”, or, “First project to unlock multibillion market of < … >”; ploys to manipulate those inclined to believe conspiracy theories like, “No corrupted central authority”; and appeals to socially alienated individuals such as, “We are creating a community/ecosystem/economy”. Those who invest on these grounds contribute to the volatility of post-ICO trading, as large sums are invested into projects which, were they to perform a fundamental valuation, they would see are likely to fail.

These investors are also particularly vulnerable to criminality. EY estimates that of the nearly $4 billion that have been raised since mid-2015 via this financing method, as much as 10% – or $1.5 million a month – of issued tokens end up in the hands of hackers.

Public blockchain and ICO

Further to this, ICOs also pose large security risks, according to a growing number of national governments. South Korea recently joined China in policing the world of cryptocurrency, announcing a ban on the use of anonymous bank accounts for the trading in the ICO market from the end of January 2018. Russia has also made continued noises to suggest it will launch its own, state regulated cryptocurrency, if not banning its trade altogether, while UK Prime Minister Theresa May also promised to clamp down on Bitcoin in particular, as she raised concerns that cryptocurrencies were being used by criminals, due to its unregulated status.

“In areas like cryptocurrencies, like Bitcoin, we should be looking at these very seriously,” May said in a television interview at the World Economic Forum’s annual Davos conference.

News