Amounts raised from ICO’s are greatly exaggerated
Almost daily, we see headlines about ICO’s raising 10’s of millions of dollars. Even though these numbers sound impressive, they’re fundamentally overstated because:
- Any attempt to liquidate the ETH/BTC that was received for the ICO will crash ETH/BTC prices due to the relatively thin (vs. price) order book of ETH/BTC.
- ICO’s that only sell a tiny fraction of their token’s have overstated market caps since it’s token prices are easily manipulable with a small amount in circulation.
- If the majority of the ICO is funded by ETH/BTC that is ‘old money’ (i.e. large ETH/BTC holders that acquired it for a fraction of the current price), the purchase price of ICO tokens should be measured against the original cost basis of those holdings. The reason this is a better measure of value is because large holdings in ETH/BTC cannot be liquidated (into dollars) without crashing the market, but can diversify risk without impacting ETH/BTC prices by exchanging them into new ICO ecosystems. Hence comparing the value of the ICO to the current ETH/BTC price is grossly overstated in these situations.
- The published amounts raised for an ICO are based against the current ETH/BTC prices. This is only accurate if the entire ICO was funded on ETH/BTC purchased at that time for the sole purposes of exchanging it for the ICO. This is very unlikely to be true, given the fact that you don’t see bumps in ETH/BTC trading volumes in the magnitude of the ICO’s raised amounts.
- Given 3 and 4, if you’re buying new ETH/BTC to get into an ICO, you’re likely overpaying. It would also explain why vaporware or immature ecosystems seem to be able to raise significant amounts from ICO’s.
My theory is that most of these ICO’s are driven by a desire to diversify BTC/ETH holdings rather than new market demand.
As an aside, I am not stating whether or not ICO’s or their underlying marketplaces have merit (I think they do in some cases). I’m simply stating that the headlines about the amounts they’ve raised are inaccurate benchmarks.
Observation (2017/09/26): Doing ICO’s or getting involved in pre-ICO rounds at large discounts gives one the ability to acquire BTC/ETH at an extreme discount. One macro strategy seems to be to accumulate as much BTC/ETH as possible, and partaking in creating ICO’s or pumping up ICO’s allows you to do this for cheap.