ICOs That Are Not Trading Yet Should Consider Offering Optional Refunds To Investors

This bear market is particularly painful for investors due to the huge amount of money lost in ICOs (initial coin offerings). The terminology “primary market” refers to the funds invested for tokens before they trade on “secondary markets”, which are crypto exchanges like Binance.

It is estimated that at least $16.72B was invested in ICOs in 2018, based on data collected by CoinDesk. It’s likely however that this dollar amount should be much greater, because Coindesk has only collected data on 1050 ICOs since 2014, while other websites such as ICObench have data on 5.3k+ ICOs. However, Coindesk’s data is well documented and thorough so it’s a good source to make more in-depth market observations with.

This bear market was unique because lots of retail investors participated in ICOs and private sales. There were hundreds of crypto funds from all places in the world, that were either family offices or managed capital, that were born in 2017, 2018 and 2019 to invest in mostly the primary market for ICOs.

Looking at the stats from 2014, there was only $30M raised from 7 ICOs, $18M of which was from Ethereum. In 2015, there was only 7 ICOs that raised $8.61M, and in 2016 there was $256.41M invested in 43 ICOs. That is an order of magnitude less than 2018, which had $16.72B invested in 650 ICOs, according to CoinDesk.

Based on CoinDesk data. 2018 only has data up until the end of October 2018, so numbers likely fall short for 2018. https://www.coindesk.com/ico-tracker

The amount of funding each ICO raised on average increased each year since 2014. In 2017, ICOs raised on average $15.98M per project, which increased to $25.72M per project in 2018.

Based on CoinDesk data. https://www.coindesk.com/ico-tracker

The problem with the growing trend of ICO raises in 2018 is that suddenly the ICO market stopped and ETH price collapsed in 2018. Although investing in ICOs in 2017 in 2018 felt like pretty safe bets based on all of the other previous ICOs returning well, there was tremendous hidden risk for when the bubble would eventually pop and all of the presales, crowdsales and private sales would stop returning well for everyone. ETH was the primary asset used to invest in ICOs as well.

Data based from ICODrops, Livecoinwatch, Coinmarketcap, TokenData.io and FoundICO.

I’ve been passively observing the ICO market and it was clear it has been returning extremely poor throughout 2018 and 2019, but for deeper trend analysis, I’ve unbiasedly collected data and looked at the stats (shown above). Please note that the data is completely unbiased in my selection. I’ve tried to include all of the ICOs that were the most well-known globally by reputation and I’ve covered all of the ICOs I could find that were ROI positive. In turns out only 5 ICOs were ROI positive after Q2 2018: Quant Network, Lambda, LTO, Contents Protocol and BitTorrent. It’s really important to note the trend on how much investors are losing with ICOs that are trading in Q3 2018, Q4 2018 and Q1 2019.

As for the ICOs that traded positively, it would be interesting to look at what were the commonalities between them for a reason for their positive performance. It seems high liquidity exchanges are the biggest common factor between all of the ROI positive coins. BitTorrent benefitted from Tron’s investor community and the liquidity on Binance. Contents Protocol benefitted from the liquidity on Upbit, the biggest exchange in Korea. Lambda, LTO and Quant Network did well on Bitmax which offers leveraged trading.

The amount of money that is trapped in SAFTs (Sale Agreement of Future Tokens) for project tokens that are not trading is not quantified or known publicly, but it is likely the 10s of billions US Dollars to my estimation. If there was a reported $16.72B raised from ICOs in 2018 and many projects, based on personal interactions and observations, have delayed trading for a more bullish market.

What’s also concerning to me are the $50M+ ICO raises that are still not trading on secondary exchanges. These investors bought into the large promise of these projects, but there was absolutely no valuation model for why these projects should raise this much money. That includes Telegram Open Network, Filecoin, Dfinity, Polkadot, Orbs, Hedera Hashgraph, Blockstack and Videocoin.

Based on data from TokenData.io.

For reference, here’s the ROI performance for the 27 largest ICO raises that are trading today.

Based on data from TokenData.io and Livecoinwatch. Note: TokenData did not have data on RSK’s RIF which raised 22K BTC.

In traditional equity IPOs, investment banks help advise on valuation and trading timing. However, in crypto, fundraising hard caps, which function similarly to IPOs, are picked most often by technical teams who decide on how much budget they need to fulfill their roadmap.

Although tokens provide “utility” and access to a product, they also borderline if not clearly function as securities as investors invest in the ICO at a primary market valuation and the tokens are soon after expected to trade on liquid secondary markets.

There were warnings all along 2017 and 2018 from investors who tried to warn ICO investors of the lack of protection, in-the-air valuations and unsustainable nature of the SAFT investment model. That includes Chamath Palihapitiya, Bruce Fenton and many more. The warnings were there, but few listened.

Atlantic Financial CEO Bruce Fenton tweeted in May 2018.
Social Capital CEO Chamath Palihapitiya tweeted in September 2017.

Given the massive losses, and continuation of losses in SAFTs that are not trading, I believe it would be wise for projects that are not trading yet to offer refunds for a large portion of their raised funds, even some of it was spent or held in ETH, back to investors. Looking at the data of all recently performing ICOs in Q3 2018, Q4 2018 and Q1 2019, I believe most will head into the majority trend of massive 90%+ losses with low liquidity.

Furthermore, many of the ICOs in the space are publicly stating that they were postponing trading to better market conditions, which further blurs the line for whether they are really launching a token that provides some sort of utility in the form of product or network access, or they are issuing a security that has the expectations of investors for near-term ROI for investors.

In this sense, it was a great decision by Basis to refund investors as the bear market and slow down of ICO market enthusiasm came to an abrupt halt, before most people’s expectations. Machine Zone’s Lit project also has been rumored to refund investors.

Although investors in SAFTs have very little protection and invested in non-dilutive capital with very little rights, there is some hope with action from the SEC for targeting projects for security violations. However, according to my counting, only three US projects settled with the SEC and offered refunds to investors this year: Airtoken, Paragon and Gladius.

One particularly interesting action taken by Gladius is how the project self-reported itself to the SEC to be compliant and remedy any potential security violations. The Gladius team mentioned that they hoped to create “a path that other blockchain-based companies can follow.” This emphasizes my belief that I think the blockchain space needs better regulation and guidance more than anything at the current moment.

Many have said the blockchain space needs a killer application. And while there are exciting developments around open finance, lightning network, blockchain games and more, investor protection and clear regulatory guidance is needed. I estimate there is a huge number of investors that have collectively lost tens of billions of dollars in ICOs globally, and the painful losses are still not over so long as these projects aren’t trading yet.

In conclusion, the crypto community got ahead of itself with the ICO mania that started to be born in 2016, and bubbled throughout 2017 and 2018. I think all projects that have raised should seriously consider offering a refund or even consider entire cancellation of the project altogether. The ICO returns in late 2018 and 2019 were bloody and catastrophic for investors and it would be the right thing to do to offer refunds.