The Appeal of Crypto Project Investment

Why is it that crypto projects became so attractive for investors? It seems that today everyone has heard of blockchains, cryptocurrency, crypto mining, and Bitcoin is literally a household name. The hype created around the price of Bitcoin, rising almost 2000% from $1K in January 2017 to more than $19K at its peak in December 2017, has boggled the minds of many. Now people have realised that ICOs are the next big thing that has rivaled Venture Capital investment. Many predict it to be the new, and possibly the most popular way, the majority of projects and startups will be invested into.

Cryptocurrency and ICOs in general, as a type of fundraising method, makes sense for a lot of reasons, one being that the average time for a startup to receive VC investment can take more than 3 months at the least. If they’re lucky to gather all the paperwork necessary, which doesn’t always happen as many projects have been stuck in the tedious bureaucratic cycle never to be seen again. Take into account the time needed to settle all related legal procedures and it’ll be several months before anything happens.

The VC startup funding hit it’s peak record in 2017 with a total $164B globally, according to a new MoneyTree Report from PricewaterhouseCoopers LLP (PwC) and CB Insights. The numbers provided are simply mind blowing, to say the least, especially if you compare them to the $3.7B invested via ICOs. Here’s another fun fact, in 2016 the amount ICOs raised was a meager $96.4M, which means that the number of capital raised via ICO has increased 38 times in just one year. This is staggering considering that the level of public trust towards them has not been great, to say the least. Although predictions vary from expert to expert regarding how will token sales affect the market in 2018, none of them can argue that these numbers will keep growing exponentially.

Another reason is that ICOs are a lower risk investment as you contribute what you can afford to lose. While VC is more about making profit in the long run and less about the support of new innovative ideas that have a risk of not proving as viable as predicted. So naturally not every investor feels like pouring funds into a concept that may prove to be less profitable if at all. Thus many startups tend to go the ICO route where they have a lot more chances of getting the necessary funds without getting involved with tons of unnecessary paperwork while also bypassing the geographical unpopularity among investors that may plague that part of the world.

Despite there being so many scams, money laundry and generally having huge amounts of unregulated money flowing past any regulatory institution, public perception of cryptocurrencies and their related projects has been somewhat negative. In 2017 China and South Korea outright banned ICOs while the US ruled that certain crypto assets should be classified as securities and ICOs should be regulated accordingly, with SEC stating at a senate hearing on February 6 2018, that all ICOs will be met with tighter regulations, while true cryptocurrencies will be embraced with smart policies.

Over the course of this year, other jurisdictions are very likely to follow suit. In 2018 the UK Treasury is set to regulate cryptocurrencies in line with anti-money laundering and counter-terrorism rules forcing traders to reveal their identities in certain cases. That said, this could drastically change the game as these regulations will try to eliminate the various problems plaguing ICOs, like whaling. The term “whale” is used to describe the big money Bitcoin players that show their influence on the Bitcoin market. A good example being the BAT ICO, which was over in just 24 seconds and raised $35M with almost a quarter of the BAT tokens being owned by one person who eliminated any chances for the other people to participate in the ICO at all.

In August last year Estonia viewed a possibility of creating its own cryptocurrency called ‘estcoin’, as reported by Reuters, that was supposed to be a “community” token to support e-Residency program to further develop the country’s economy by letting anyone establish a remote business in Estonia without needing to visit the country. Although in December Estonia’s central bank said that estcoin was not a government initiative and no further statements were made, this is still a good sign that not all governments are shying away from the potential seen in cryptocurrency and blockchain technologies. Venezuela and Sweden already considering of introducing their own crypto. While Japan – arguably one the most progressive countries in the world – has fully embraced the new crypto trend by allowing “virtual currencies” as a legal form of payment and obliged all exchanges to obtain the mandatory licensing as a payment institution in Japan. With MUFG (Mitsubishi UFJ Financial Group, Inc.), the largest bank in Japan and the fourth largest in the world, announcing plans to launch its own cryptocurrency exchange, a pegged cryptocurrency and bitcoin segregated accounts for clients of other exchanges.

Although many believe that government's involvement in the cryptocurrency space will slow down the ICO investment market drastically, others believe that it was not only inevitable, but also a necessary step in bringing cryptocurrency investment up to par with other traditional investment methods. Despite some investors getting scared off most of them this year will get involved with this new means of funding, seeing its true potential. They will most likely demand further business validation and transparency, making it increasingly difficult to raise capital having nothing but a white paper making the quality of future ICOs better while in all probability reducing their quantity. Here’s where Escrow comes in as a means of providing the necessary obligations stipulated by the projects white paper and ToS giving a much needed mechanism of refunding in case the project fails to deliver its promises. Currently there are several companies that specifically specialize in acting as an escrow agent with the most prominent and reputable being Escrow.com and Transpact.com just to name a few.

In summary ICOs are not an ideal solution for every business , but they remove the barriers between investors and entrepreneurs from neglected geographies with opportunities of investing into innovative ideas that would traditionally be ignored by VC. Although right now ICOs are not quite the equitable funding solution that will topple down the Venture Capital empire, at least not yet. Nonetheless, in 2018 we’re likely going to see new currencies and platforms, while investors, financial institutions and governments will step up to shape the market with new regulations, solidifying cryptocurrencies in the traditional financial system.

John Ganchak
5 Reasons Most ICOs Fail

When you start researching the reasons behind why so many ICOs fail, you inevitably come across a few common problems – it’s either a scam or a really poorly presented idea. Although this is true these are not the only reasons so many of them fail. Truth be told, each case must be analyzed individually to better understand the reasons behind the failure, but a quick analysis of their most common problems can lead to a much more simplified list of potential disasters that can overtake an ICO.

Although the first ICOs can be dated back to 2013, they only recently massively emerged on the market as a viable investment alternative to the more rigorous investment process required by venture capitalists or banks making it an even more tempting option. Some would even call it ‘easy money’ and this is one of the major reasons there are so many fraudulent ICOs out there. But let’s say we put aside the potential of fraud and imagine a more utopian scenario where there is no risk of fraud, what would then be the cause of failure? The answer then can be broken down into the following 5 categories for simplicity:

  1. A reliable team
  2. Proof of concept
  3. Marketing
  4. ICO transparency
  5. Security

Let's go into a bit more detail to understand why the above 5 points specifically are directly responsible for an ICO to succeed or failing at achieving its goal.

A reliable team

Although it may not always be apparent, but a good team of professionals can be the real cause of any success or failure. In order to understand what kind of a product you’re dealing with, you must first understand what kind of people are behind it. Are they reliable? Do they have a good track record? Can they deliver the promised product? Most people don’t take this point into account only to find themselves investing into a sketchy project that may not deliver what the team behind it has promised, simply because it’s unclear who exactly is behind it and what are their true motives.

Make sure to cover the basics and do your research on the project's leadership, lead engineers, financial advisors and so on. Even a simple search through the team's LinkedIn profiles can be enough to prove their credibility in some cases while others require a deeper dive to better understand if they can deliver on their promise and how good their track record really is.

Proof of concept

What has become a rather unsettling trend, is that so many ICOs seem to get away with only nothing but a pretty website and a white paper having no real proof of concept to show the potential investors that this is more than just an idea. Although cases where an ICO was successful with nothing but the white paper are not unheard of it’s now becoming more of a trend rather than a smart business strategy. It also seems to scare off serious investors away from such projects more often in the recent months.

The idea of having a working concept is much more appealing to the big investors out there especially if this concept can show part of the main functionality of the product even on a micro scale. In most cases a white paper on its own isn't enough to really understand if such a product can be delivered with the funding required and the time taken, so most project ICOs should be taken with a grain of salt and a decent dose of caution if no proof of concept exists. Of course there are always exceptions to this rule, as with all the rules, but you can never be too careful.

Marketing

Imagine having a product with a team of capable professionals and a working prototype, practically production ready, but something still goes wrong and the ICO is failing to reach its goal within the time constraints given. How did that happen? Sometimes a badly designed marketing campaign can spell doom even for the most ambitious of the projects and that’s the cold hard truth. Timing is also a major factor to take into account as bad timing can undermine any marketing campaign.

You could say that a well explained white paper that boils down the project into simple to understand goals is part of the art of marketing. This will essentially be the main tool that will help the project leverage the right amount of attention from potential investors, so it should be well designed with the goal of the campaign in mind. The more relevant the traffic, the more successful the campaign, besides, all this traffic will be most invaluable for retargeting.

But let’s not forget that marketing isn’t always only about the advertising and promoting, it’s also about figuring out the correct market for the project and the correct audience i.e. the customers and also the investors. ICOs are closely associated with blockchains and so far not every market and industry is ready to implement blockchain solutions into their infrastructure, at least not yet.

ICO transparency

This is a big one, a real complicated topic, but probably the most important and one that is crucial in times when so many ICOs turn out to be a scam or operate without transparency. Being a public company is a huge responsibility as you are virtually under the public eye like under a microscope thus you must be very clear with your intentions. Here ICOs ideally should resemble IPOs, meaning they should require an extra level of legal framework and regulations in order to show some credibility, unlike an IPO whose credibility is undeniable due to the rigorous legal work involved from accounting firms, banks and even venture capital companies. This is why great responsibility comes with anything that involves crowdfunding via ICOs. If the people behind an ICO plan to use public money they’re pretty much obliged to provide information on what exactly they plan to do with these funds. This is precisely why public dashboards, independent auditors, public relations and community managers should be an integral part of the ICO process for any project.

A good sign of a transparent ICO is when delivery promises are well articulated and explained to the investors so that they could be correctly measured. When your backers know how their invested resources are being used during the development of the project they have a good idea on how the team operates especially if their public GitHub repository reflects the progress made when reported to the investors or the public. Which bring us to the point of a transparent and frequent communication between the team and the backers with forum updates, newsletters and monthly reports on milestones etc., something that most projects tend to ignore these days.

Security

Let's imagine a hypothetical situation where you launch an ICO, everything seems to be in check, a great team of professionals, a brilliantly planned marketing campaign and you even have a working prototype. All you need is to push the button and launch your campaign, getting as many investors interested as possible, but something goes wrong and there’s no incoming cryptocurrency although there was sufficient interest in your project. Now you hear rumors that people seemed to have invested hefty sums, yet you saw none of it so far on your wallets, only to find out that someone stole it. Seems like a nightmare doesn’t it? More like a scam and an elaborate one at that, as what happened is the project’s security integrity has been compromised or simply was overlooked before the start of the ICO and the project’s website has been cloned to a different domain, the wallets changed and now some hackers are getting your cryptocurrency.

This is just one of many potential security threats that can ruin an ICO. The problem is that an ICO doesn’t have to be a scam in order to become a part of one. Most, if not all, ICOs who neglect their security and don’t take the necessary measures to prevent such threats inevitably become the victims of a scam or a very aggressive provocation. It was estimated that at least 1 in 10 people have become victims of a scam because of poorly designed security measures or faulty codes with approximately $225 million in Ethereum stolen via various cybercrimes in 2017 alone! The above mentioned method of cloning a project’s website is just one of many ways the scammers get a hold of your cryptocurrency and with the constant threat of scams it is the investors themselves who most often fall prey to hackers and frauds who impersonate project members, create clone websites, social network pages etc.

These are just a few of the reasons why ICOs fail, but they are nonetheless essential and most common. There are plenty more details to discuss, especially for each ICO individually, but this will require a deeper dive into all the small nuances, like cryptoeconomics, product viability, time constraints, token velocity etc. We will discuss more in depth these subjects in the future. For now, we see a more mature ICO market that is rapidly growing and is making steps in the right direction by acknowledging its own mistakes and striving to find the right solutions.

John Ganchak
Blockchain market is growing

Per the https://coinmarketcap.com/ 20.12.2017 total 24h volume of cryptocurrency market was more then 50B USD which is more than New-York stock exchange at the same date.

Maxim Maximov
... Then you win!

"First they ignore you, then they laugh at you, then they fight you, then - you win." Mahatma Gandhi.

Who knew about bitcoin in 2011? When solution was in use and only particular peoples were interesting in it. In 2014 it get a huge growth to $1000 and then drop to $200. Peoples were laughing on those who boght bitcoin for 900 USD... At the same time government, hackers and global corporations started massive fight with bitcoin: exchanges were closing, China and other governments introduced strong regulations for it. End 2017 BTC price is 16000 USD....

Now is the next and final step for blockchain.

Maxim Maximov