ICO Market Update: How Price Action Affects Market Sentiment

Comparing data between the first and second quarter, our analysis shows a strong relationship between the price of the biggest cryptocurrencies and activity in the ICO market, including hard caps, the number of ICOs opening per week, and total funds collected when all contributions are converted to USD. Large scale fundraisers like the ones recently closed by Telegram and EOS are increasingly becoming dominant forces in the market and will provide funding for many smaller projects out of their new war chests, and the record setting EOS crowdsale raises questions about Ethereum prices going forward and its popularity as a fundraising platform.

Crypto Price Action Is Related To Behavior Of Investors And Token Issuers

Our comparison uncovered lower average hard caps in the first half of the second quarter as compared to the first half of the first quarter, along with fewer projects opening and much lower dollar denominated fundraising totals for all but the private Telegram Open Network sale, a major outlier. Driver of these trends included both investment behavior and crowdsale openings lagging cryptocurrency market fluctuations, rising in the first quarter in response to Q4 2017 price movements and falling in the second quarter in response to price changes in Q1. Our metrics also measured a more real time effect of price volatility — conversion rates to fiat in the first half of Q1, even as prices fell, were far higher than in the first half of Q2, even as prices rose.

Examined in greater detail, prices for some of the most popular cryptocurrencies have experienced large fluctuations over the periods being examined, BTC ranging from nearly $17,600 in early January to just $6,750 in mid-April and Ethereum from over $1,400 in January to a $365 April low. That’s a drop of 61.6 percent and 73.9 percent, respectively. Price changes of this magnitude will inevitably put downward pressure on both hard caps and fundraising totals that rely on conversion to fiat currencies, most commonly USD, for projects that raise a majority of their funds in crypto.

Hard Caps Can Be Sensibly Calculated — Or Not

The hard cap set by a project can indicate a number of different considerations an ICO team has made about their project. This number can represent the largest amount of money a project believes it can make effective use of, or the highest amount of funds the team believes the market of investors has an appetite for. In some cases, teams likely set their caps at a level higher than they really expect they can fully achieve to try to raise as much money as possible, and some are picked randomly, or only using a general idea of what other recent ICOs have raised.

On the other hand, these types of projects are balanced out by those that underestimate their funding needs or try to be as conservative as possible, or projects that are meticulous about understanding their needs and setting a hard cap with exacting precision. And of course, projects that denominate their hard caps in crypto and set them in the euphoria of December 2017 might end up with a very different amount of usable funds when their crowdsale closes in the lows of April.

Hard caps in the first half of the second quarter were 31.7 percent lower than during the first half of the second quarter, owing to a combination of the factors outlined above. The waning public interest associated with bear market conditions after December likely lead smart teams to try to do more with less and discouraged the strategy of setting an unachievable high cap, while lower conversion rates brought average caps down across the board.

ICO Launch Counts Are Affected By Crypto Prices In The Recent Past

Following periods where the prices of underlying crypto assets like Ethereum and Bitcoin are looking bullish, ICOs launching are far more numerous; following periods where prices fall, the impulse becomes to reschedule or find another way to raise funds, judging by our records of ICOs opening per week since November of last year. This could be a lagging indicator — in the first half of Q1, after prices had begun to fall off of all time highs, 327 ICOs opened their coffers to contributions — an average of 46 per week.

In the first half of Q2, after prices had stabilized and even shown signs of beginning to recover, just 226 ICOs opened for an average of 32 per week. That’s a 30 percent drop in openings between a period when prices were falling compared to a period when they were rising instead. Another possibility is that lower fundraisers for ICOs could be driving down the price of Ethereum — when fewer people are interested in blockchain based projects, demand dries up and asset prices fall from a lack of transaction activity.

Really Big Fundraisers Keep The Momentum Up

With lower crypto prices, lower hard caps, and fewer projects opening in the first half of the second quarter, it’s little surprise that total funds raised by all projects would be lower — in this case by 57 percent compared to the first half of Q1.

In spite of lower totals for one-off ICOs, Q2 will still set records for dollars pouring into crypto. The private Telegram Open Network offering totalled 1.7 billion USD, while EOS closed on a $4 billion year-long crowdsale at the end of May. Even though the source of funds for these record breaking fundraisers are very different, the effect for many teams seeking capital over the next several months will be the same — trying to appeal to these two huge war chests and convince them to help fund their piece of the crypto dream.

EOS And Crowdsale Funding

While not included in the either first half quarter totals, the year-long eosio public sale closing at the end of May gives additional perspective to where the ICO market may be headed. Raising over $4 billion in ETH, the huge close may breathe new life into publicly funded token sale events after prospective token issuers see the results of the largest crowdsale to date, even if it bears only a passing resemblance to smaller scale projects that run for a few weeks instead of a full year. EOS could also have a ripple effect on the price of Ethereum in particular if it grows into a suitable platform for raising funds via token sales by lowering the demand for ETH transactions that by some analysis make up 92 percent of the chain’s transaction volume. There’s much debate on the effect of EOS on the price of Ethereum over the last few months with persistent allegations of EOS dumping contributed ETH to push the price down — an effect that may become even more pronounced as various smaller projects receive funding from those contributions over the next several months.

What Does It All Mean?

The ICO market is still largely at the mercy of the highly volatile price of the cryptocurrencies used to invest in various projects. With this in mind token issuers will need to think carefully about timing and fundraise targets, and if they want to target private investors, the general public, recent fundraising champions with lots of capital to go around, or a combination of these options. Projects that survive their initial months and years in this highly volatile environment will need to make smart plans and tough choices about how they collect and spend their crypto, and what platforms they bet on to fund and build their product. In the end, this may prove more challenging than many of the technical and philosophical problems blockchain projects aim to solve.

New Alchemy is a leading blockchain strategy and technology consulting group specializing in tokenization, offering ICO advisory, security audits, C-level strategy, smart contract development and token mechanics to the most innovative companies worldwide. Get in touch with us at Hello@NewAlchemy.io

@TokenReport is a part of New Alchemy, focused on providing independent data insights and research on digital currency markets.