Why Token Sales Fail
It’s been five years since the peak of the first token sale hype, and the notorious acronym “ICO” (Initial Coin Offering) is slowly receding into memory. Token sales in various forms and formats have tried to fill the void, but none have capture the imagination, or currency, of the public the way they did before the Crypto Winter of 2017. It’s safe to say things are just not the same. Whether it’s a Security Token Offering (STO) or one of the many other three-letter-acronyms for creative attempts to get people to buy digital assets, today is a far cry from the once instantly successful ICO’s of the past. It’s genuinely puzzling that so many, from entrepreneurs to established companies, still think that a token sale is an easy way to attract investors. It’s not. And there are several obvious reasons.
It’s genuinely puzzling that so many, from entrepreneurs to established companies, still think that a token sale is an easy way to attract investors. It’s not.
What happened to the ICOs?
Let’s just reflect a moment on what has happend so far. Back in the “good old days” the “coins” being offered in an ICO usually represented new cryptocurrencies, and the project selling this new coin planned to launch a new blockchain, where the token would be used as a native currency or utility token. Ethereum is the best model for this, and was incredibly successful to the point of essentially being an industry standard. Ether is still the form of payment required to use the Ethereum blockchain.
But using the Ethereum network has proven to be costly, especially with so many Token Sales launching there and driving up the “gas prices.” See some self-reinforcing effect here? The Ethereum token sale was coincidentally the first (successful) ICO in history. There is no way to bypass this payment of Ether in order to use the Ethereum blockchain, so the “coin” has a utility value. It was highly speculative, but still reasonably safe to bet on a sharp increase in the Ether price because it was so ubiquitous.
Copying this model required at least some software development and networking skills, but the early blockchain and crypto adopters had those resources. Unfortunately, the number of viable/profitable blockchain use cases is limited by what the technology is actually good at, and not everyone is a developer. Still, the idea of getting quick and easy funding via an ICO was incredibly tempting, especially as the hype started to surpass the reality of what was possible.
Then things got ugly. Hundreds if not thousands of projects popped up offering “tokens” with some arbitrary value, most of them with no actual utility for the described project, but artificially shoe-horned into the idea… because you need a token if you want to do a token sale, right? It was much like the early days of mobile apps, where every business rushed to have one whether they added any real value or not.
In many cases, there weren’t any software developers behind these projects, or at least ones that didn’t have experience with the technology. It became something of a Wild West, with countless terrible white papers, market criers, deception, and fraud, all contributing to a huge speculation bubble in Crypto, that resulted in a predictable market crash and the first long and cold Crypto Winter, which became the death knell for most running ICOs and killed off the market value of most existing tokens. Eventually, the regulators stepped in and created rules for future token sales, which choked a lot of projects and turned tokens mostly into securities, aka secrity tokens. The Ethereum token sale, for example, would not be legally permitted these days — and that would have been a tragedy.
Why do Token Sales fail today?
#1: Lack of enthusiasm and liquidity
One of the reasons why tokens sales struggle today, aside regulatory hurdles and lack of actual utility, is that many of the early ICOs used token sale contracts based on Ethereum’s native currency, Ether. Many investors used to be early-movers in Ethereum, so they often had an unexpected fortune in ETH. Others had the same with BTC or other early-day cryptocurrencies, and there were successful business models for service providers converting BTC into ETH and selling tokens. These fortunes are largely gone now, and the experienced hands still holding large quantities of ETH know how to distinguish good projects from the bad ones. So in short: hype, enthusiasm, and liquidity are a far cry from the good old days. But that’s not the only driving factor.
#2: Regulations
Regulations have caught up with blockchain technology and imposed many restrictions. Most tokens count as securities these days, and securities are difficult to sell. You need a prospectus in most jurisdictions, and you need to do KYC/AML. This costs money, can require time consuming development and management, and is an effort that deters many potential investors. You also can’t just list the tokens on exchanges, which means investors are stuck with their token and are unable to flip it or sell it on. The effort to list tokens is really high; you need legal advice and regulatory clarity, etc. For all this red tape we can thank the many bad actors who sold worthless tokens to gullible investors. The number of scams justifies tough regulation.
#3: Product-Market-Fit
The main reason why most token sales fail these days is because they want to be better than all the notorious scammy ICOs from the past. Many token sales today offer investment in real businesses with real revenue and accountable assets. This is a good thing! But, these real businesses make for a bad Token Sale.
Here’s why. Tokens that are backed by real assets (such as a revenue share token) have a quite stable value. These tokens are like equity, but different in that it’s just a value granted to the holder without ownership rights. And because they come from a real business, they must follow all the rules of the classic economy. If it is a classic business, it is a classic investment, it just comes in a new shape — a token. Tokens are regarded as insecure and easy-to-steal. The newspapers are full of stories about massive thefts and exploitative scams. The technology is hard to understand for most people, especially old school investors who are happy with a yield of 3–7% per year. (We’ll come back to that later).
So why does it have to be a token? They come with all sorts of practical issues. If you loose the private key, they are lost forever. They are not accepted on Exchanges. Banks don’t want to keep them for you. You are mostly on your own. In short: it’s the wrong packaging for an otherwise reasonable investment for an interested audience. Solutions for that in the form of tokenized equity held by third parties are in the making. However, that can hardly be called a token sale.
Finding the Right Audience
Let’s look at the other side of the equation. Obviously there ARE people who like to invest in tokens and have no problem with the technology. They invested billions in the early ICOs and were perfectly happy to take care of their tokens themselves. What about them? Well, we said we’d come back to the yield. Let’s assume an average 5% for an investment with a real business. Then the “value” of your investment roughly doubles in 20 years (not counting inflation, which is about 5% alone already — and more!).
The crypto/digital asset savvy audience is used to very different numbers. Bitcoin often doubled value in a matter of weeks. Some coins multiplied in days and then imploded in hours. But that’s exactly what the crypto/token investors are after. Gambling, not real business.
So if you plan a token sale, don’t count on these people if you have a real value in your business. It’s not going to help you to try and raise money from token speculators, it’s just going to be a burden.
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At CoreLedger, we believe that blockchain is a practical technical solution to improve and solve a wide variety of issues across industries and sectors, which is why we try to cut through the hype and focus on real-world applications, not just what’s technically possible.
CoreLedger’s mission is to help businesses of all sizes quickly and affordably access the benefits of blockchain technology. From issuing a simple token to enterprise-grade token economy solutions, we have all the tools and components you need to quickly and affordably integrate blockchain into your business whether you’re a new startup or a big multinational enterprise.
Interested in our results-focused, real-world approach? Visit our website for more information, or get in touch with us directly to discuss your project.
