In the last few weeks stories about ETF rejections, dwindling user numbers and trouble with the fundamentals, have no doubt contributed to the ongoing crypto bear market and been triggers for a sell-off of digital assets.
To add to the list a new theme which may dig an even deeper crypto price trench is emerging — the liquidation of crypto holdings by ICO projects.
Fundraising — crypto’s killer app?
During mid-to-late 2017 a major factor in the exponential rise of BTC and ETH, was their use as liquidity for on-ramping into ICO projects. The ICO projects were designed with ERC20 smart contracts. They gave project developers access to people interested in supporting their solutions via a straightforward transfer of cryptos in one form for another, all hosted on the Ethereum network.
The ERC20 protocol standard smart contract led to the emergence of the Ethereum blockchain and created one of the first real use cases for blockchain smart contracts — as a tool for fundraising. Given the popularity and accessibility of Ethereum and Bitcoin, they tended to be the tokens of choice for ICOs.
However, in recent times the volatile nature of crypto markets has meant that ICO raises denominated in ETH and BTC are beginning to see the value of their holdings diminish significantly as crypto prices have tumbled.
For example, HDAC claims to have raised US$258 million worth of BTC during its Nov/Dec 2017 ICO. On the last day of the ICO the price of BTC was $13,670. Nine months later it is worth less than half of that, currently trading at $6,260.
This means that if the HDAC project has held on to its BTC holdings, rather than at some point liquidating for fiat or transferring it onto a digital stable coin like USDT, the value of the ICO would now be worth over a $100 million less.
Such a scenario is concerning for many ICO projects, who are likely beginning to get cold feet about the diminishing value of the crypto they accumulated during their raises.
The fast-paced, volatile nature of crypto markets exaggerates this issue and adds to the discomfort felt by the projects. The longer the wait to shift the crypto on their books, the greater the potential losses because of the severity of short-term price swings.
Additionally, the nature of financial bear markets means that if ICOs begin dumping their crypto holdings, and traders catch wind of large sell orders – potential losses are inflated because the growing FUD contributes to the slide.
In the short term, this means a potentially precarious situation for crypto investors. ETH and BTC currently make up 68% of crypto’s market cap meaning that any movement in their price affects the whole sector.
An alternative perspective
While the current bear run has likely impacted the treasuries of many of the 2017 and 2018 ICOs, many of them were massively over capitalized and the vast majority of them should have more enough funds to ride out the current market.
The average amount raised across 122 tracked ICOs in 2018 so far is ~$53.3 million, with a median value of $11.3 million (The average value is inflated by the EOS ICO, which earned over $4 billion).
Compare this to traditional venture capital raising where the first stage is normally a seed round, with 15 or fewer investors raising from $500k to $6 million for market research and early product development. Even with its war chest reduced by half the average ICO should still be sitting on a pile of cash equivalent to that of a very well capitalized VC funded start-up.
In the case of such a VC startup, once the early product development stage has been completed and the project has been deemed robust enough, they enter a series A, where a wider pool of VC firms invest between $2-$10 million for an equity stake in the venture.
Overall, it’s a more staggered, milestone-centric fundraising process, without instant access to the ‘lake of liquidity’, as has been the case with ICO raises. ICO project founders could probably learn something from that process.
Overall, while it’s true these ICOs will likely have to do some belt-tightening, that’s not a bad thing as it should focus the founder’s minds on product delivery and profitability – and not before time many would say.