In recent weeks we have seen an escalation of an interesting trend in the ICO space; cancellations of public sales. Nucleus Vision, Theta, CoinFi and Current are just a few of the high profile names to cancel their public sales.
Why is this happening? Well, it’s an unintended consequence of the massive success of the ICO fundraising model. Once an ICO gets enough hype (lets say >20,000 telegram users) private offers from institutional investors, pools and wealthy individuals start to flood in. This means the founders are now able to reach their funding goals just through these private offers. They no longer need to do a public sale to raise the money they want.
And don’t underestimate the work involved in running a public sale. There is a noisy 24/7 community to manage, scammers and hackers to fight, legal paperwork to get through and the risk of regulators knocking on your door.
So for many teams it’s a no brainer; take the private money and cancel the public sale.
So what, who cares?
Well there is an obvious ethical issue here. Teams are using the little guys to build the hype which attracts the whales, and as soon as they get their money from the whales, they dump the little guys. Oh yeah, and then the little guys are expected to buy on exchange so the whales can sell their bonuses.
But hey, that’s capitalism in an unregulated market, right? So I’ll let others argue about whether it’s ethical or not. I’m more interested in the unintended behaviors this new trend is encouraging and what this might mean for the health of the whole ICO market systemically.
Whitelist Led Investing
Investors are racing to get on whitelists earlier and earlier to avoid missing out. It’s becoming a game, to the point that many investors will get whitelisted and join the telegram channel of every new ICO, before doing any research at all. Why does this matter –because it creates a non-rational FOMO amplification loop.
Retail investors join a whitelist not to miss out; the whitelist then closes due to overwhelming demand; investors are convinced to purchase tokens because of whitelist demand. But actually didn’t everyone just sign up to the whitelist so as not to miss out? Did anyone actually research the project or do any due diligence?
Increased early adopter risk
If you can’t get into the well-known ICOs because they have cancelled main sales or sold out the whitelist, then you have to look at less well-known projects. Now this doesn’t necessarily mean lower quality ICOs, but it does increased investor risk. Why, well retail investors are increasingly buying into pre-sales at an early stage in order to beat the rush. They are hoping (gambling?) that the projects they choose will then get hype and sell out.
The problem with this approach is that retail investors are committing before projects have come under the scrutiny that comes with hype. Before community influencers have finished their spreadsheet scores, before AMAs have taken place, before even a whitepaper has been issued in some cases.
In an already high risk market retail investors are being forced to take on ever-greater early adopter risk.
The Rise of the Pools
An alternative response to the inability of individual small investors to get in to well-known ICOs is to pool your money with a larger group. These pools help the little guys get the kind of access that larger investors enjoy. But, at a cost…
Pools add fees, complexity and trust to participating in an ICO. They create another organizational and technical layer at which investors can make mistakes or potentially get scammed. They also set an interesting precedent in that they add back a middleman into the previously direct ICO relationship between founders and token holders.
I’m not saying pools are bad per se, but again, in my opinion, they increase risk for the investor.
Why does all this matter?
Well because retail investors, contrary to popular opinion, are not stupid. Frustration is growing; just look at the telegram channels of any of the ICOs that cancelled their public sales.
The ICO market needs retail investors for two very important reasons; firstly to help raise the capital for amazing new blockchain companies. But secondly, and more importantly in my opinion, to create a distributed user-base for the products of these amazing new blockchain companies.
Without a well-distributed retail token owner base most utility token models simply don’t work. Sure an ICO needs to raise money for the founders to build their business, but an ICO also needs to create an incentivized passionate community of users to use the new blockchain or d’app. If you sell to only a handful of private investors, who is going to use your platform?
If ICOs become too complicated, too expensive or too frustrating, retail investors may stop bothering. If retail investors stop creating the hype and demand then those private investors will dry up too — they do not want to be left holding the bags.
If you keep cancelling the party, people might stop turning up.
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