The top Initial Coin Offerings (ICOs) and what to look for
While initial coin offerings (ICOs) can offer investors the potential for high returns, this is not without risk: a large proportion of ICOs fail.
So, what should you look for when evaluating ICO opportunities? We consider some of the most successful ICOs to date and the underlying characteristics that made these deals fly.
Winners in a minority
A recent report from ICO rating agency ICORating found that most (55%) ICOs failed to complete their crowdfunding in the second quarter. This compared to a failure rate of 50% in the first quarter.
Investors booked a return of -55% from new ICOS in the second quarter versus a positive 55% return in the prior quarter. About 9% of the projects quickly disappeared without a trace.
Overall, the report pointed to a deterioration in the average quality of projects, with outright winners in the minority. Investing in ICOs is clearly a risky endeavour that needs to be approached with caution.
A popular, traditional means of raising funds from investors is an initial public offering (IPO). In this way, investors subscribe for an allotment of shares at a given price before the stock is floated on the stock exchange. The shares you own in the company come to represent your equity ownership.
Through an ICO, however, you acquire digital tokens with the hope that these will ultimately be useful in a digital network.
Utility should be paramount then to establishing the long-term value of the digital coin being offered through the ICO. Or more accurately, the estimation of utility; typically, the digital network in which the tokens are destined to be used will not be completed until after the ICO is finalised.
Some of the funds raised in the ICO itself tend to be earmarked for investment in the crypto network.
Perception versus reality
In the short-term, the value is likely to rest on the perception of utility in the marketplace. Potential investors in ICOs typically scour the project’s whitepaper to establish how useful and sought after the coin is likely to be in the future.
The strength of the arguments put forward by the company doing the ICO and how these are received by investors can therefore impact the demand and the price of the digital coin in the immediate term.
In the longer term, post ICO, other factors will come to increasingly dominate, such as news flow related to actual progress on the project and any evidence of real world usage for the coin.
Herein lies both the problem and opportunity inherent in ICOs; the short-term performance of the coin is likely to rest on factors that are highly speculative in nature. It could easily be three to five years or more post-ICO before you know if the digital coin is really a success or not.
However, as the company behind the digital coin progresses along this journey, there should be an increasing amount of hard evidence on which to base this judgement.
Block.one leads in terms of the amount raised in its year-long ICO for the EOS digital coin, having netted over $4bn.
Much of the allure of EOS has been attributed to the track record of the block.one management team. For instance, its chief technology officer is none other than Daniel Larimer, the creator of the BitShares and Steem platforms.
The EOS.IO platform is intended to support a more efficient environment for decentralized applications versus the likes of Ethereum. As a “smart contract” platform, EOS.IO has the theoretical capability to conduct more than a million transactions per second, and without transaction fees.
Its scalability in terms of the number of transactions it can handle is thought to be far superior to Ethereum, which copes with about 15 transactions per second.
Backed by one of the well-known stars of the blockchain world and promising to eventually supplant the ether coin, the second largest crypto by market cap, EOS fast captured the imagination of investors.
Nevertheless, although EOS now stands at fifth in the crypto rankings, with a market cap of over $4.7bn, not all investors will be pleased with EOS’ price performance. Those who got in early on the ICO would have achieved the best investment results; EOS launched on July 26, 2017 at an initial price of $1, and was trading at $12.25 when the ICO closed on 1 June, 2018.
However, it has since weakened considerably and now trades at $5.19 compared to an average token price of $5.74 during the year-long ICO. It’s certainly been a bumpy ride over recent months, with EOS having plunged from an all-time high of $22.98 at the end of April.
Ethereum itself had its ICO in 2014, the year it was incorporated in Switzerland, raising $16m from investors. While this amount pales in comparison to the huge sum raised by upstart EOS, early investors in the ether coin have plenty to cheer about.
While ether has undeniably seen some price volatility this year, the current price of $284 compares to its initial crowdsale price of $0.311. That’s a return of over 91,000%. The huge utility potential of the Ethereum blockchain platform soon became widely recognized by investors.
At the same time, it’s to be expected that rivals such as EOS have emerged over recent years seeking to replicate the Ethereum format while aiming to better some of its features.
Ethereum has become a popular way for developers to raise funds for their new applications, enabling them to create digital tokens.
Through the creation of smart contracts, Ethereum’s blockchain technology has the potential to boost the efficiency of business processes across a wide range of industries. Ethereum is an example of a ground-breaking project with a high degree of utility.
NEO has long been billed as China’s answer to Ethereum, enabling the creation of smart contracts much like its Switzerland-based rival. Like ether, the NEO coin is viewed as having high utility potential, with the underlying blockchain technology having applications across a wide range of industries.
Known as AntShares until 2017, NEO raised just $550,000 from its first ICO in October 2015. It went on to raise a further $4.5m through a second ICO about a year later.
NEO currently trades at $16.59, in comparison to the 2015 ICO price of $0.032, a return of 51,744% Nevertheless, as with cryptos in general, NEO has had a bumpy ride this year, having traded as high as $196 in January.
As China’s first home-grown, decentralized, open-source blockchain platform, investors saw NEO as having a major competitive edge in its local market, a notoriously difficult one for foreign firms to gain access to. There was also a perception that NEO had some support from figures within the Chinese government.
AntShares, as it was previously known, was founded by Chinese entrepreneur Da Hongfei in early 2014. Da Hongfei fronted a slick, transparent marketing campaign for its ICOs, with a focus on social media. There was also vocal support for the project from Chinese central bank officials.
Early investors have enjoyed great price performance from NEO, making it one of the most successful ICOs of all time from a return perspective. However, some of the later investors may be dismayed that NEO is not currently ranked higher than its current 15th place in the global market-cap rankings, which puts it behind the likes of IOTA, Dash and Tron.
NEO has experienced significant price weakness over recent weeks, losing more than half of its value since early July. In August, NEO fought back, announcing enhancements to its platform, including an increase in transaction speed.
Just ahead of NEO in market-cap ranking terms is digital token IOTA, currently the world’s 12th biggest crypto.
Along with having high utility potential, its innovation and relative uniqueness also stand out as major selling points. It is distinguished as the only major digital currency not to rely on a full blockchain to complete transactions.
IOTA is touted as having more scalability than blockchain-based cryptos, thereby making it ideal for use in transactions on IoT networks, with the latter viewed as high-growth areas in their own right.
IOTA’s current token price of $0.47 compares to its 2015 crowdsale price of $0.001, with early investors making a return of 46,900%. The ICO itself, conducted during November and December of 2015, raised around $400,000.
NXT is much lower down in the market-cap crypto rankings, in 85th place. However, those who invested in the ICO stage have experienced some of the best returns. NXT currently trades at $0.066662 versus its September 2013 ICO price of $0.0000168 ICO price, for an amazing return of 396,698% over the space of about five years.
The blockchain and crypto sector was very much in its early stages of development when NXT held its ICO. Just $16,800 was raised through the ICO to develop the NXT platform.
NXT was conceived as a platform for building applications and financial services, offering a messaging system alongside an asset exchange and marketplace. It also enables users to develop their own applications/digital currencies.
Returns from many of 2018’s ICOs look puny in comparison to some of the early stage blockchain ICOs. Among this year’s successful ICOs was that of the Huobi Token, a blockchain powered-loyalty points system. Through the Huobi Token, users can get access to transaction fee discounts of up to 50% and other benefits such as liquidity protection.
Huobi reached its crowdsale target of $300m in February, while the coin itself has risen by about 40% in US dollar terms since then, from $1.52 to $2.10.
While Huobi Tokens offered a high level of utility, the fact that Huobi already operated a crypto exchange based in Singapore was viewed as both reducing the project’s risk and increasing its credibility.
Blockchain projects can have promising long-term prospects and raise substantial sums through ICOs, but still disappoint as an investment. This was the experience for some of the later investors in the year-long mammoth EOS ICO, though those who joined the party in the earlier stages may still be sitting on good profits.
It’s been very much a hit-and-miss affair for ICOs with more conventional crowdsale windows this year as well.
Zeepin, a crypto token and blockchain platform focused on the creative industries, reached its crowdsale target, raising around $62m from an ICO in early 2018. Zeepin currently trades at $0.029, some 78% below its ICO price of $0.13.
Even worse, the Dragon token, designed for frictionless payments in the gambling industry has lost 95% of its value since its ICO in March.
Macau-based Dragon raised $320m through its token sale, making it one of the biggest public ICOs of 2018. This was, however, short of its ambitious $407m target, with the shortfall having hit investor confidence when the coin started trading in the secondary market.
In a similar vein, Bankera, which will offer banking solutions alongside its own crypto exchange, raised $151m, well short of its $216m target. Bankera’s token has lost about 86% of its value since the ICO ended in early March, currently trading at $0.0028 versus an ICO price of $0.0207.
Olympus Labs raised more than $60m from the private and pre-sale rounds of its ICO in January, with the company claiming this apparent success meant it did not need to have a public crowdsale. Its MOT token is designed to plug into a financial ecosystem/marketplace for financial products, services and applications.
However, MOT has lost 91% of its value since being listed in the secondary market. There no longer seems to be much hype around the token; Olympus has fewer than 10,000 followers on Telegram.
Messaging app Telegram cancelled the public phase of its ICO after raising $1.7bn from private investors for its TON blockchain and digital token. TON should enable Telegram to host decentralized apps, payment services and file storage, complementing the messaging app, which already has 200 million users.
Telegram appeared to cancel the public ICO due to both the success of its private fund-raising efforts as well as to avoid a potential probe into its activities from the US Securities and Exchange Commission (SEC). Given the rising concerns about ICO-related fraud, the SEC has been taking a greater interest in ICOs in general this year.
Investors will probably have to wait until 2019 before the TON token is listed on exchanges.
Keys to success
Utility of the token and the underlying technological capability of the blockchain tend to be the most important factors in determining the performance of a crypto token post-ICO. In other words, if a token is likely to be in high demand from users because it can bring them tangible benefits then it should see plenty of price support once it is trading on exchanges.
It follows that the better the technological foundation of the blockchain, then the greater the user benefits are likely to be. For example, being able to conduct transactions more quickly and efficiently than other blockchain systems currently in the market makes a big difference.
Factors such as the quality of the ICO marketing campaign and the effectiveness of the pre-ICO communication are also extremely important. It sends a bad signal to the secondary market when an ICO crowdsale target is not reached, raising questions as to whether projects will ever have sufficient funds to achieve their longer-term objectives.
Blockchain projects with good whitepapers and high-profile founders, who make effective use of social media, have been among the most successful in raising funds.
Having a decent social media following is important; tokens with larger numbers of followers on apps used by the crypto community should be more likely to receive the right kind of attention once they start trading in the secondary market post-ICO.
Credibility will be a big factor in the success of any ICO, with investors scrutinising the individuals that make up the founding team behind the blockchain as well as the track record of the company launching the ICO.
While high-profile individuals can help on the inside, it also boosts confidence when an ICO token receives endorsements from influential people on the outside.
Genuinely innovative projects should do well when investors can recognize unique selling points that provide a competitive edge.
Specialisms can have a positive impact but being focused on just one industry can be a doubled-edged sword. While this can boost the utility of the enterprise with a certain set of users, some of the most successful blockchain projects have been able to capitalise on their wider application across multiple industries.
There can be higher risk attached to “one-trick ponies”; having applications across various industries can bring some diversification in terms of risk as well as boosting long-term demand for the token.
Investing in ICOs should not be taken lightly; as the blockchain and cryptocurrency industry becomes more mature, serious research is required if you are to have a chance of identifying the winners.
Just because a blockchain project is successful in raising funds does not necessarily mean that the underlying token will turn out to be a good investment.
Commercial projects in general can have a high rate of failure in their early stages of development. That’s why it can make sense to spread your investment across various opportunities rather than put all your eggs in one basket.