ICOs and crowdsales have become a staple element of launching new projects in the blockchain sector.
Projects have applied blockchain technology to industries as diverse as gaming, supercomputing, venture capital, and content distribution–and to raise funds, they sold a cryptographic token that plays some part in their technology or business model.
This method of fundraising affords founders minimal friction in raising capital, and 2016 has seen many such sales.
ICOs and crowdsales aren’t new
Crowdfunding activity has certainly picked up in 2016, but it had a rich history before The DAO crowdsale made headlines around the world by raising over $130 million. In 2014, Ethereum, promising to bring a turing-complete language to the blockchain, raised over $15 million (in BTC) through an ICO-like fundraising period. In 2013, Mastercoin (now Omni) raised over $600,000 following protracted discussion of how to build a protocol layer on top of the Bitcoin blockchain.
Below is a graph of all major ICOs about which Smith + Crown has gathered data. Individual ICOs and crowdsales are represented as vertical red lines, while the total amount raised each year is represented as a blue bar. The DAO is highlighted specifically because it was an outlier and because all funds were returned–it represents the intent to fund but much of that funding was likely recycled to other projects.
It shows that ICO activity has been increasing, with particular surges in activity over the past year. Even without The DAO’s outlier contribution to total fund raising, 2016 has seen more ICO investments than all other years combined. Given that we filtered out many ICOs that failed to raise $50,000, this understates the total amount of money flowing to these projects. We’ve also included projects that turned out to be scams, like deClouds, because funds were invested and never returned.
Funds raised aren’t the whole picture for cryptocurrency investment–and in some cases, aren’t even an accurate picture. Not all ICOs have a single public blockchain address that provides an auditable digital trail–some use multiple addresses or generate new addresses for each participant. Moreover, the total amount of funds raised isn’t necessarily all outside investment–project founders could recycle all of their own BTC or even get friends to participate, all the while returning funds after the sale is over. There is no auditing of project spending after funds have been raised.
ICOs and crowdsales are new, and they don’t yet show any sign of going away. A major market slowdown, as happened in 2015, could broadly dampen enthusiasm for new projects and investment, but it’s not clear yet whether the bubble is ready to burst–or whether it’s really a bubble at all.