For all the hype and chatter we listened to going back to last year, initial coin offerings have suddenly gone dead.  The entire month of January 2018 raised only $52 million according to ICOWatchlist.com.  In the halcyon days this was the rate of  inflow every three days (it’s important to note that crowdfunding amounts vary, but there seems to be a general downtrend in the market from the data we were able to collect). What happened and what does it mean?  First, let’s take a look at some numbers that may bore you but help illustrate the point.

Last year produced just under $4 billion in fresh capital to fund startups. According to ICOWatchList, $1.8 billion was raised in the five months ending in October.  About 78% of the ICOs used the Ethereum platform.  This explosion helps us understand some of the energy that pushed Ethereum into the forefront of the cryptocurrency sweepstakes.  Between Halloween and mid January the price of Ether quadrupled in value hitting $1338 (Coinbase).

Investors suddenly viewed Ethereum as the poster child for ICOs.  Obviously the open source nature of its blockchain platform along with its smart contracts feature offered a natural fit for startups looking to raise capital.

The reality, of course, is the use cases for Ethereum go vastly beyond facilitating ICOs but for an investing public getting started on crypto investing, it didn’t matter.  When outsized returns are being achieved, who needs to understand the details.

ICOs Get a Bad Rap

In recent weeks a lot of bad press has been earned by certain bad actors in the ICO space.  Much has been written about the cryptocurrency startup Confido. Someone posing by the name Joost Van Doorn raises and then vanishes with about $375,000 sometime just after November 15th.   Trouble was Joost also deleted the Confido website and his presence on LinkedIn and Facebook.

Subsequently, Mr. Van Doorn resurfaced and is working to make financial amends but the media has yet to say much about this side of the story.

Some analysts of ICOs claim the incident of scamming with ICOs runs a high as 20%.  It is difficult to verify how these numbers are derived.  These and related ICO stories can not be helping instill investor confidence.  

Regulation of ICOs Would Be a Mistake

There is an argument suggesting that in order to improve the ICO marketplace, it should be regulated presumably by some authority such as the US Securities & Exchange Commission for example.

Here is why that won’t work.  The presence of ICOs have their origins in crowdfunding, that being the outgrowth of The Jobs Act passed during post financial crisis by the Obama Administration.  The whole purpose was to create pathways for unregulated capital raising by young companies.  To date ICOs have evolved into the most efficient way to accomplish the goals of The Jobs Act.  

One of the most compelling arguments in favor of ICOs is their ability to circumvent the jaws of venture capitalists.  In a typical arrangement for a young company to raise money a VC might demand a 50% equity stake and a lengthy 5-7 year lock up in exchange for providing just the first few million in capital.  By the end of the lock up, the company may have many more millions in capital but the founders are left with just a sliver of equity.

Last year three companies: Tazos, Filecoin and Finney went the ICO route raising a total of nearly $600 million without giving up equity.  This represents democracy in the capital market and that is a good thing.

Misconception About Size of Offerings

One of the biggest misconceptions about ICOs relates to the perception that they are all  tiny little startup companies that have little more than a whitepaper and a wish for fast cash. Reality is there were thousands of ICOs that were attempted last year but few went very far.

ICO Watchlist data covers about half of all capital raised last year: about $2.3 billion. The average ICO raised nearly $40 million and that is required some greater substance that a whitepaper and a wish.  Granted that the data is bias toward larger sized offerings but that does not reduce the importance that ICOs are playing in the capital formation process.   

Institutional Investment Opportunity

Rather than tighter regulation of ICO, there should be tighter research on the buy side.  For the individual investor this could present a problem.  How much research can one person do if 20 or more ICO come to market in a short period like a single month.  This is where Venture Capital and hedge funds with their well staffed analytical departments have the edge: 2018 could be the year it happens.  

Here is the key point for institutions everywhere.  Global stock markets are clearly overvalued based on interest rates.  The shaken US market is confirming this fact.  This raises the question of relative risk.  Is there greater risk in global equity markets than in cryptocurrencies?  The answer appears to be yes and that will increasingly favor cryptocurrencies.