How Cryptocurrencies are Evolving Past the Traditional ICO
Initial coin offerings (ICOs) once defined the cryptocurrency industry. New ICOs for legitimate, impressive sounding coins were being released alongside scams, and scams were being released alongside tongue-in-cheek jokes, like Useless Ethereum. Despite despite its silly premise, it managed to generate over $300,000 in funding. In case you aren’t familiar, a traditional ICO is comparable to crowdfunding for a new coin. A startup or group of developers offer a new kind of cryptocurrency. Then, they accept funding from investors in exchange for a fixed amount of currency at loss, proportional to their contributions.
ICOs became incredibly popular after the 2017 growth spurt from Bitcoin. In a matter of months, Bitcoin went from a barely noticeable novelty to the main talking point of investors, futurists, techies, and average people all over the world. Since then, there’s been a major decline in the number and total value of ICOs. Back in January of 2018, there were 160 independent ICO projects ready to close. In October of 2019, there were none.
With some analysts suggesting that ICOs are “dead” and others suggesting an upcoming renaissance in ICOs, what does the future hold for cryptocurrencies? Cryptocurrencies appear set to evolve beyond the need for ICOs. But, let’s take a closer look at the variables changing the landscape of ICOs.
The Rise (and Fall?) of ICOs
Why are ICOs on the decline? This isn’t a fluke. It’s a consistent trend — and one that’s been developing for a few years. The question is, what’s motivating the trend, and is it going to continue?
The Sheer Number of ICOs
Bitcoin exploded in popularity in a relatively short period of time. This surge in growth led many amateur investors to believe that this was only the beginning. They thought many coins would grow to the same level of prominence, or even surpass Bitcoin’s popularity. Accordingly, hundreds, then thousands of ICOs emerged. That sheer number of emergent ICOs was also problematic. With thousands of competing brands of coins, no single coin had the opportunity to stand out, especially with household names like Bitcoin dominating the market.
Fraud and Consumer Trust
It’s also worth noting that many ICOs were plagued with bad accounting practices and misleading information. In some cases, they had outright intentions to defraud investors. Clever criminals and gray-area swindlers were eager to capitalize on public trust and the novelty of cryptocurrency to make a quick buck. In fact, many never released a full version of their intended cryptocurrency.
In part as a response to the number of fraudulent ICOs and in part due to increasing respect for cryptocurrency, the SEC and other agencies have increased their efforts in regulating ICOs (and cryptocurrency in general). If you try to plan an ICO today, it’s going to be much harder. You’ll need to provide more documentation and evidence of your work. Plus, you must adhere to a tighter set of standards.
Less Media Interest
Part of the explosion of ICOs was due to the sensationalism purveyed by the media. Bitcoin made thousands of people overnight millionaires, and news outlets were quick to report on this. Cryptocurrency stories got a lot of clicks and views, so it was only natural that media reporting would increase. However, since Bitcoin’s stabilization, there is far less media and public interest in ICOs.
How Cryptocurrencies are Evolving
New coins are still emerging even though the traditional form of ICO is getting rarer and rarer. So what are companies and developers doing to evolve?
First, we’re seeing a resurgence in token innovation. Startups are no longer striving to “become the next Bitcoin,” as Bitcoin (and a few similar coins) are already established. Instead, they’re looking to add a twist to the cryptocurrency formula or offer a technology with distinct advantages over traditional and current market offerings. This often means forgoing the option of an ICO.
For example, Uhive is an emerging social media network that utilizes a unique token—the Uhive Token—as a form of currency within its platform. It’s designed to make it easier to trade goods and services, advertise, and even receive rewards for engagement on the platform In other words, it’s meant to improve transactions on the platform rather than replacing a global currency.
As a kind of light replacement for ICOs, we’re seeing the development of IEOs—or initial exchange offerings. Instead of creating a brand-new token with a brand-new platform, an IEO allows developers to introduce their token using an existing cryptocurrency exchange. It’s a way of building confidence in your investors. This reduces the chances of fraud, simplifying certain regulatory requirements and taking advantage of an already-established user base.
Because one of the biggest obstacles for ICOs these days is overcoming regulatory hurdles, some coin developers are attempting to make up for this simply by putting in more legwork. They invest in a bigger team, they foresee more legal loopholes, and they get everything in order long before even announcing an ICO.
Accordingly, the number of ICOs is decreasing, and they’re becoming more spaced out. Nobody likes to deal with excessive oversight. If you’re proactive and you have ample resources, it’s much easier to manage.
What’s Next? Key Variables to Watch
So what’s next for the world of ICOs? Are we about to see a resurgence of ICOs in the future? Will IEOs come to replace ICOs as a similar, but updated form of offering? Or, is the future of cryptocurrency relegated to unique, innovative companies trying to do something new with the blockchain?
The SEC has taken action to improve the quality and stability of ICO offerings, but there’s still much work that could be done in the future. So far, the SEC has only recognized two cryptocurrencies as not securities: Bitcoin and Ethereum. While they’ve made it more difficult to put together an ICO, it’s not an unreasonable process. The SEC and other organizations may make changes in the near future that make it easier or harder for new coins to emerge. Or, they may change how coins can enter the market.
Competition has a kind of self-policing effect. If there’s a lot of competition in the crypto market, developers will be discouraged from trying to enter the game. With fewer competitors, it will be easier to make an impact, especially if you have a totally unique business model.
Most of this article has focused on ICOs in the United States and the SEC. But, it’s also worth noting the global disposition toward ICOs (and cryptocurrencies in general). Certain areas may be more lax about ICO standards, resulting in a location-based surge in offerings in the near future. Changing global attitudes could also have a major impact on how coins are regulated everywhere.
The future also depends on developer ingenuity. Clever, original ideas will always find a way to get to market. If there are new breakthroughs in how the blockchain is created or how coins are distributed, it could open the door to a new wave of something similar to ICOs.
ICOs do seem to be on the decline, according to every notable measure. However, this is actually a good thing for the future of cryptocurrencies. Fewer ICOs mean the quality of ICOs is going to increase, the number of cases of fraud will decrease, and original, transformative ideas will become more common.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.