Why Crypto-Powered Fundraising isn’t Dead Yet

Howard Goldstein  |

Back in 2017 and part of 2018, ICOs, short for Initial Coin Offerings, occupied headlines across the fintech world for many good - and bad - reasons. In 2017, crypto startups had used ICOs to raise over $5.4 billion in funding, a huge figure considering the mere $1 billion raised via traditional VC investments over the same period.

But as the ICO industry grew, so did the number of failed ICOs and infiltration of scams, trends that saw regulators try to rein in what they considered the largest digital platform for con artists. These regulations, combined with tanking cryptocurrency markets at the end of last year, saw a significantly fewer number of successful ICOs popping up, with an even smaller number of potential investors showing interest for ICOs on search engines.

Still, even though a significant number of traditional ICOs did turn out to be fraudulent, the fundamental idea of fundraising via crypto-powered digital platforms isn’t quite dead. In fact, there are a number of signs that point to the revival of ICOs, or at least ICO-like platforms that try to improve traditional ICOs.

Initial Exchange Offerings

One of these emerging, ICO-like platforms is Initial Exchange Offerings, or IEOs. Unlike ICOs that had investors buy tokens directly from the company, IEOs include an extra level of due diligence that requires companies to pass through crypto exchanges when offering tokens. Here, crypto exchanges are responsible for reviewing the project, verifying customers, and eventually distributing the tokens, which introduces a level of curation for crypto-powered fundraising.

The potential for a less risky investment environment within the crypto world has made IEOs an attractive prospect, with the 23 IEOs held so far this year raising about $180 million in funding. Many investors who are placing their faith in IEOs are retail investors who got scammed in the wave of ICOs in 2017, which is part of the reason why many observers within this sector think IEOs might actually become bigger than ICOs.

But IEOs, like many things crypto, aren’t devoid of risk. Pre-launch vetting, a significant element of IEOs, varies across exchanges and doesn’t necessarily escape the regulatory oversight of agencies such as the US Securities and Exchange Commission. This means that most IEOs aren’t available for US investors just yet and the few that exist, are based in exchanges located in places outside the US where regulations are less stringent.

Regulation and a possible crypto bull run

Still, in regulation, crypto-based fundraisers have found perhaps the safest, most scalable version of what ICOs and related entities could ever be. Steve Hong, CEO of Pantheon X and a champion of crypto innovation, is among a growing group of players within the ICO space that have been calling for regulations that do just enough to limit the number of bad ICOs while promoting innovative practices. Hong, whose early-stage startup hopes to provide a better interactive infrastructure for financial experts and traders, says the next wave of crypto-funded startups will thrive on the back of non-prohibitive regulations, something that is already happening.

Mid last year, for instance, the largest trading platform globally for financial instruments, the Intercontinental Exchange  (ICE), announced the creation of Bakkt, a federally regulated trading platform that gives traders access to bitcoin futures and other instruments. The venture, which is in partnership with the likes of Microsoft  (MSFT), Starbucks  (SBUX), and the Boston Consulting Group, shows just how significant a regulated crypto platform can be for investors and why a curated, well-regulated ICO environment can fuel the next wave of innovation within this space.

Regulation is also closely tied to the recent upheavals within cryptocurrency markets, with the value of many digital assets plummeting by the close of 2018 as investors struggled to understand what these new regulations meant for their crypto portfolios. But as we head deeper into 2019, investors are likely to make more sense of these regulations, which will in turn help boost investor confidence and possibly help spark a crypto bull run that will positively impact crypto-based fundraising.

And the signs of a bull run are already emerging - bitcoin has been on an upward trend since the beginning of the year, hitting the $5,000 level earlier this month after hovering under $4,000 for most of the year. Plus, with predictions of an ethereum takeover once the crypto bull run takes off, ICOs and related platforms, many of which run on ethereum-based smart contracts, may have more to gain than lose.

Therefore, while there’s still a long way to go before startups can fully capitalize on the crypto world for fundraising, current developments point to a growing thirst by savvy investors for such platforms, something that will push the industry into more innovation and subsequent growth going forward.

DISCLOSURE: I hold no positions in any of the aforementioned companies.


The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Companies

Symbol Name Price Change % Volume
ICE Intercontinental Exchange Inc. 81.12 -0.69 -0.84 2,333,014 Trade

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