To describe the third quarter of 2017 as a transformative one for the cryptocurrency markets is in many ways to state the obvious. More interesting is to consider the variety of unique ways in which that meaningfully describes these markets. While one can easily point to simple metrics such as total funds raised or the size of the largest ICOs as measures of an unprecedented quarter, a number of significant but less often remarked transformations have been taking place as well. The range of blockchain and crypto projects that have appeared during the quarter is staggering. National regulators’ attitudes to the industry have evolved. Public awareness of the crypto sector and in particular ICOs continues to grow. Perhaps most significantly, the crypto industry has been influencing traditional asset markets, and less widely noted, traditional asset markets have been influencing the crypto industry and ICOs in particular. Overall, there is a wide range of metrics by which the milestones of this highly significant quarter can be measured. Equally interesting is that as the markets begin to mature, the emergence of richer datasets lends itself to new forms of analysis and deeper insights into crypto markets.
Q3 2017 in Charts
While Q3 2017 was marked by several more subtle transformations in the industry, some of the big stories can nonetheless be seen in the data and told through charts. The charts below illustrate the sheer scale of growth in these markets and provide an initial manner of appreciating the changes of the last few months.
The generalized market observations contained in the Smith + Crown index neatly capture the major swings of the quarter. The index itself performed as if it was auditioning for a place in a technical analysis course, nearly tripling off its July low before executing a near-textbook 50% retrace of its gains into early September. While the action of the index during the quarter will not resolve the perennial question of whether price makes the news or news drives market movements, we note that the major swings were neatly bookended by the SEC’s ruling on the DAO in late July and the Chinese ban on ICOs in early September. (We discussed these events in an extended September article on ICOs and regulation, and touch upon them again below.)
Quarterly figures for ICOs presents a different look at market activity
The blue bars in the chart below illustrate how the number of completed ICOs during Q3 grew to 135, well more than twice the previous quarter’s 60. Overall amounts raised by all the ICOs in the quarter also grew by 100%, to $2.3 billion. Given that 2016’s entire ICO raise amount came to approximately $100 million, the progress can fairly be described as rather robust.
A different measure of the growth of the ICO market during the second half of 2017 is captured below. In blue are the largest ICOs through April 2017, when a series of records were set as several sales in the $14 million to $15 million dollar range occurred in a single month. While many were slightly astounded by that series of ICOs, by the end of Q3 those same sales had been so significantly and substantially surpassed that they struggled, mostly unsuccessfully, to hold their places in the overall top 50 ICOs by amounts raised. Glimpsed together, as in the chart below, the visual commentary on how far markets have evolved is a powerful one.
This enormous increase in the sizes of the largest raise amounts during the past six months could be the subject of its own extended analysis, but is generally attributable to three overlapping and interacting trends. One is simply increasing investor interest in the sector, particularly for innovative, foundational projects and protocols. The second trend, that of the increasing scale and ambitions of the largest projects, is itself undoubtedly a partial response to increasing investor interest and a recent awareness that substantial funding is likely available for the top projects. The less generous interpretation of this trend is that entrepreneurs are rhetorically asking themselves, “Why raise $10 million when I can raise $50 million?” Finally, more novel and legal funding channels are emerging, such as token Reg D offerings, Simple Agreement for Future Tokens (SAFT) agreements, and similar structures restricted to high net worth investors. These appear to offer companies and investors reasonable protection from potential regulatory crackdowns while increasing accessibility and appeal of ICOs to institutions and more individual investors.
Charts, Data, and…Readings of the market
The above charts present a tale of a market barrelling ahead, gaining increasing steam each quarter as more and more sales are completed and increasing amounts of capital are raised. The chart below documents that claim in another way, with the orange line showing how the average amount raised per sale has increased sharply during 2017. However, as suggested in the bubble chart above where the largest recent sales substantially exceed the somewhat homogeneous set comprising the previous largest sales, the outsized sales that have generated so much market attention can also be viewed as playing a severely distorting role within the overall set of figures by which the markets are customarily measured. We can better appreciate this argument in the chart below, where we consider the quarterly ICO and average raise chart alongside a second measure of the average raise amount after stripping out the top 10% of largest sales for each of the last two quarters.
From this perspective, several observations emerge. While the largest sales (i.e., EOS, Tezos, and Filecoin at $516, $262, and $228 million, respectively) represent obvious outliers, the decline in the average raise amount once they and a few other top sales are removed presents a stark image of the degree to which the ICO market is dependent upon a handful of ICOs for many of the headline numbers relating to amounts raised and average sizes. Removing this top 10%, for instance, reduces the average raise amount by well more than half.
As the chart below shows, the total raise amount is likewise reduced by nearly two-thirds during two of the last three months when this same top 10% of sales are removed. Removing that group also makes clear that while the rather dramatic trend of increasing raise amounts remains, the trend begins to appear as a considerably less significant indicator of the broader progress of the market, giving the overwhelming concentration of funds in just a few sales. In the monthly view below these observations are all the more apparent.
Adding to this impression of a market that has become somewhat bifurcated as the largest raises continue to increase while the broader averages remain generally flat is the following chart, where we incorporate a measure of the median raise amount into a chart showing average raise amounts on a monthly basis. The decline in the median over the past few months, a theme that has largely gone unremarked, is relatively unsurprising given the dramatic increase in ICO offerings.
While these observations–in particular the declining median raise amount–do not necessarily suggest that either the larger crypto sector or the overall ICO market is unhealthy, they do create a more nuanced impression of how the market is evolving. As we have suggested elsewhere, the uneven distribution of funds can be seen as evidence of a discerning market, where investors are ready to heavily back promising blockchain-related projects–as seen in the +$100 million raises for EOS, Tezos, Filecoin and Bancor–but where many of the more niche, speculative, or simply poorly conceived projects have struggled. While the struggles of many ICOs to raise funds or even attract communities of backers for their projects have struck us as largely predictable, the surprising challenges of a number of strong, industry-specific teams to cultivate broader appeal or widespread support for innovative projects with long-term prospects has been surprising. Such instances have also left us considering the multiple possible explanations for why certain projects find market support and others do not. It also made us curious which tokens perform well after trading and why–a topic we will explore in a forthcoming memo.
Popular Interest, and Regulatory Concerns
Despite the complex portrait of the ICO market during Q3 2017 presented by the above data, where growing amounts raised were in tension with a sharply falling median raise amount, another strong trend was the increasing public awareness of the crypto space and the ICO markets. This growing awareness developed from different directions and took different forms. Some, such as frequently ridiculous banner ads preying upon…someone, apparently, were of questionable value. A handful of celebrity endorsements were also a feature of the third quarter, but beyond creating fodder for the press, one wonders what the return on investment was for such events. The chart for Centra, the Floyd Mayweather-endorsed token that closed its sale in late September and has subsequently lost 75% from its initial price high, appears to suggest that the beneficiaries of Mayweather’s efforts were perhaps not those who followed him into the ICO.
On a more serious note, the growing public awareness of blockchain-related projects and the larger crypto world tended to arrive from two competing angles. One took the form of increasingly frequent references to the expanding use of blockchain technologies in public and private sector projects. Whether it was IBM announcing an expansion of its blockchain efforts, announcements from Estonia or Dubai regarding plans for a state-backed currency, or Boise, Idaho where a municipal partnership with blockchain startup ULedger was announced, a steady stream of mainstream news and announcements brought attention to the space.
The relatively weak performance of certain tokens seen in Q3, amidst increasing noise about the sector and what, at least in certain cases, appears to be the incidents of somewhat less than perfectly informed retail investors participating in the market, was also related to another central theme of of the quarter, that of increasing interest on the part of securities regulators globally in the cryptocurrency space and ICOs specifically. As discussed in September when we explored key themes related to the issues of regulators, investor protection, and ICO regulation, we noted that the founding concerns of commercial and investment regulatory bodies revolved around the protection of small investors, and given some of the recent practices occurring in the ICO space, the interest of regulators is unsurprising. Specifically, we noted how despite the repeated warnings and numerous breathless utterances from regulators charged with protecting small investors, the steady progress of blockchain-related technologies even within different levels of the same governments regulators spoke for, suggests accommodations will ultimately be forged allowing ICOs, the primary funding mechanisms for the companies developing these technologies, to proceed. Further, we suggested a likely convergence of some sound, well-established ideas from traditional securities markets with established practices in the ICO and crypto world would ultimately make that process a not terribly painful one, at least for the soundest companies in the crypto space. Evolving experiments in places like Canada, where regulators have developed a trial process allowing ICO white papers to be modified to meet minimum requirements for securities documents, illustrate how the gap between the two worlds is less significant than is commonly understood. That regulatory bodies in places including Gibraltar and the Isle of Man have also announced their intention to develop officially-sanctioned, compliant structures intended to welcome ICOs further suggest how these questions of regulation are likely to evolve. Despite what we suspect will be a largely positive resolution to ongoing concerns about potential regulation, headlines during the 3rd quarter were still dominated by official pronouncements relative to ICOs and the crypto space more broadly, as seen below.
This emerging global concern with ICOs that saw regulators around the world speaking up also reflects the spreading global reach of ICOs, another theme we explored recently when we discussed both the number of ICOs and amounts raised in countries around the world. Among the Interesting observations to emerge was that global averages for amounts raised remain, for the most part, within a relatively narrow band across the range of countries hosting ICOs, as seen in the chart below.
Evolving Best Practices
Another theme of the quarter was that of the evolving, and generally improving best practices of companies in the sector and those seeking to raise funds through an ICO. We discussed this trend briefly in early September where we highlighted a number of encouraging trends. Prominent amongst these were increasing efforts of the strongest companies in the sector to adopt and even contribute to the development of best practices in the space, and for companies to consciously promote their professionalism and transparency in an effort to appeal to investors. Whether in terms of promoting efforts to ensure the security of token sales, to promote the distribution of tokens to a wide group of community members and investors, promises to provide ongoing financial and technological reports, and to cultivate informed communities of users and supporters, the positive trends designed to increase the appeal of projects were widespread. In part this was unsurprising, for as noted above the increasing numbers of ICOs vying for community support and financial backing naturally led the strongest teams to promote their strengths and professionalism as a distinguishing feature. A second aspect of this trend is that as money from outside the traditional crypto world begins to explore the space–both an unsurprising result given recent market performance and a necessary one given the scale of funding now required by the largest projects–teams are forced to appeal to outside investors in manners those groups have come to expect. This has led to more a distinct trend of top-tier companies differentiating themselves through the preparation of more professional, sophisticated whitepapers including greater discussions of risks and timelines, the adoption of improved disclosure and transparency practices, improved processes around the token sales themselves, and the inclusion of promises to regularly file financial and technical updates and progress reports. As we suggested during our September report, we expect these trends to continue going forward as a central theme of the ICO space, and even to assuming increasing prominence as the convergence between the so-called financial Wild West and that of regulated securities continues to diminish.
Summary and Conclusions
The diversity of trends and themes that emerged during the third quarter of 2017 present a formidable challenge to easy attempts to characterize the quarter in simple terms, or as being primarily defined by a single dominant trend. The nuanced view of the market and specifically the ICO data presented above make clear that a complete accounting of the quarter requires acknowledgement not just of ever-increasing record rises, but also of declining median amounts, as well as a number of more subtle and complex trends. Beyond the numbers upon which the quarter’s statistics can be calculated, and arguably more important, the trends of growing interest in and awareness of the space, whether from a wider range of investors, the public, and official and regulatory bodies, as well as the increasing professionalism of many of the groups in the sector, is encouraging. Taken together, these trends may ultimately lend themselves to an overall view of the quarter that most accurately characterizes the ensemble of trends as one of maturation. Given the wide range of significant developments during the quarter, most of which defy simple explanations, that may ultimately be the most accurate measure of the quarter.