Market for Initial Coin Offerings on record breaking and maturing path

17 September 2018 7 min. read

A record breaking opening to 2018 has seen Initial Coin Offerings yield more than their total funds raised since the first ICO in 2013. The market’s continued boom has been boosted by regulation in some key markets, which has helped the fundraising method mature and become more accepted as a mode of business, though fears of criminality in the sector still persist.

An initial coin offering (ICO) is a means of crowdfunding centred on 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 other cryptocurrencies such as Bitcoin or Ethereum, or increasingly for fiat currencies (currency that a government has declared to be legal tender, but it is not backed by a physical commodity). These tokens become functional units of currency if or when the ICO's funding goal is met and the project launches.

The first ICO took place in 2013, with a total of two taking place that year. By 2014, this had risen to eight ICOs with a combined total value of $30 million. The total value of Initial Coin Offerings breached the barrier of $4 billion globally last year, with further growth projected for the coming period. Now in 2018, ICOs have gained further momentum and are emerging as a workable, alternative form of crowdfunding. Strategically, ICOs continue to crowd out traditional VC funding, especially in technology and Blockchain-related start-ups.

Hybrid models (combining classic VC/PE funding and ICO) are increasingly establishing themselves as a valid funding alternative. The continued rise of the ICO in 2018 has even seen the funding technique yield its firs unicorns (start-ups worth over $1 billion). Telegram and EOS boast an estimated record breaking $1.7 billion and $4.1 billion, respectively.

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. ICOs are inconsistently regulated across the world, and, depending on the jurisdiction, they can take different forms including a security, utility token or digital currency. Prospectively, ICOs are increasingly an alternative to classic debt/capital-funding as performed today by Venture Capital/ Private Equity firms and banks.

Leading countries for Initial Coin Offerings

ICO unicorns

Overall, in the first 5 months of 2018, a total of 537 ICO’s with an estimated value of $13.7 billion have been closed successfully – which is more than all pre-2018 ICOs combined. According to data gathered by PwC’s strategy consulting wing, Strategy&, in cooperation with Crypto Valley, the US, Singapore and the UK remain the world leaders on the ICO front, in terms of volume. The trio have closed 157 successful ICOs between them already in 2018, with a further 153 planned before the end of the year.

The USA can chalk its success as a leading ICO destination up to its market being reinforced by clear and firm regulatory requirements, for example with the new Know Your Customer commitments, which ensure businesses verify the identity of clients and assess potential risks of illegal intentions for the business relationship. The UK has seen a growth in terms of volume and value, with its estimated funds raised standing at $507 million, Singapore yielded the highest value from ICOs of the three leaders. Singapore’s 53 ICOs brought in $1.1 billion in total. However, in terms of value, these campaigns have yielded proportionally far smaller amounts of capital than those based in the Cayman Islands, and the British Virgin Islands.

Thanks to these nations’ reputations as keystone tax havens, it is perhaps unsurprising that investors keen to see large returns would locate their funds in ICO projects which will ultimately be taxed minimally. The ten ICOs of the Cayman Islands scored a total of $4.2 billion, and the location has a further 16 such funding efforts planned before 2018 is out. At the same time, the 16 ICOs of the British Virgin Islands brought in a total of $2.2 billion, but there are only two further fundraising projects planned for that territory before the turn of the year. While the two island states might seem to command a disproportional amount of ICO funds, however, it is important to note that the aforementioned ICO unicorns were based in those locations.

Largest Initial coin offerings

As mentioned, the two unicorns EOS and Telegram dwarf the amounts brought in by the other top ICO campaigns to date. Their nearest equivalent, also hosted in the Virgin Islands, was Dragon. The Dragon Coin is said to act as a frictionless, low-cost & transparent alternative financial mechanism within Casinos, and raised $320 million.

Beyond these three, the top ICOs were dominated by those based beyond the Cayman and British Virgin Islands. Singapore hosted the fourth largest, Huobi Token, which delivered $300 million of investment. Elsewhere, Switzerland hosted six entries in the top 15 campaigns. HDAC (#5) raised $258 million, Tezos (#7) brought in $232 million, Sirin Labs (#8) saw $158 million, Bancor (#9) yielded $153 million, Polkadot (#11) enjoyed a $145 million investment, and The DAO received $143 million from backers.

The largest Initial Coin Offerings to date ($ million raised)

The US also hosted multiple ICOs at the top of the list, with Filecoin (#6) bringing in $257 million, and Basis (#14) gaining an investment of $133 million. Lituania (#10, Bankera, $151 million), Barbados (#13, Polymath, $139 million) and Israel (#15, Orbs, $118 million) each played home to a single top ICO meanwhile.

While the ICO market seems set to continue its growth in the coming years, however, there is still some scepticism about the technique. Investors are often deterred by the fact that only around a third of all announced ICO projects actually close successfully, while many projects are delayed and lose momentum during ICO preparation processes. Reasons can reach from legal struggles to problems within the ICO project team. At the same time, the market is still dogged by a reputation for a propensity to hosting fraudsters.

According to a report by EY last year, while many legitimate sources also use ICOs, many projects are often guilty of trying, with questionable ethical intent, to attract investors to help “introduce 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. These investors are also particularly vulnerable to criminality, as of the nearly $4 billion raised since mid-2015 via this financing method, as much as 10% – or $1.5 million a month – of issued tokens are estimated to end up in the hands of hackers.

If the ICO industry is to continue its meteoric rise it will need to address these concerns. On the evidence of markets where regulation has become more binding for the practice, such binding mechanisms have boosted rather than inhibited ICO growth, and so it is likely there will be more to come from governments across the world looking to provide a safe and reliable destination for ICOs and their investors.