What a year 2016 has been for crypto! In a true thriller fashion, there were hackers, there were outright scams, there were million dollar ICOs and of course there was the DAO.
There was the rise of Ethereum and towards the end, the rise of Bitcoin. So let's take a step back from this madness and highlight some important trends.
ICOs are Going Mainstream
Like it or not, this trend is pretty clear. ICOs are going mainstream. For several years now, ICOs were the dominant way to bootstrap a new crypto. Even among the many scams and projects that fell wayward, ICOs kept on going and taking on new investor money.
The successful companies saw their ICO tokens skyrocket, giving impetus to the rest of the market (and unfortunately the many scams that follow in its wake). No matter what the projects say (software presale tokens, for example), investors are in it for the token speculation in the hopes that it will rise in price - let's not kid ourselves.
So how was 2016 for ICOs? Glorious, in one word.
Our friends at Smith + Crown did some number crunching for everyone in the world of ICO. According to their data, there were a total of 65 ICOs. Note that I am excluding The DAO for various reasons and we'll talk about it later. In total, all the ICOs of 2016 raised $100.5 million (again, according to the data above). That's serious money. And not just serious by crypto standards - that's serious money from a 'traditional' financial perspective as well.
To provide some color to the number $100 million, take a look at the following chart:
In 2015, angel investment was around $300 million. Now ICOs are not very close to traditional Venture Capital, especially the later rounds, but is close enough to seed-stage venture investing. But you're talking about crypto-ICOs being a third of all the angel-money flowing into the ENTIRE tech sector. That's big by any standards you dice it.
Now what will 2017 bring? It is anyone's guess of course, but we believe the trends will continue, i.e. we'll see more and more promising companies go the ICO route instead of looking for traditional VC or angel investing. There is enough money in the ecosystem today to sustain a few high-profile companies and names, and we suspect those will come to the forefront in 2017.
New Wave of ICO Investors
Traditionally, here is how the sequence of ICO investments played out:
1. Some people make big money in one or more projects, like Ethereum.
2. These investors take their profits, and want to invest back in the crypto-world. These become the 'whales' or dominant investors of the next round.
3. Investors prefer to invest within their domain of expertise. Therefore, Ethereum rich-list investors would like to invest in Ethereum-based tokens (therefore The DAO debacle).
4. The sequence continues, as long as there is enough outside money flowing into the ecosystem, so the entire ecosystem grows. New ICOs get formed, some of them become hugely successful, the profits from that flow to new projects, and so on.
However, as the ecosystem is maturing, we are already witnessing new players in the ICO and crypto space. This is probably good for the entire ecosystem, but long-term members and investors will need to be aware and beware of the new players because they may have different motivations and skills than the early-adopters of crypto.
Let's recap the big fish in crypto in 2016.
This story didn't get a lot of attention, but in my view, should have been a big one. Polychain Capital, a hedge fund (traditional) based on crypto and ICO trading alone, raised $10 million. Polychain Capital is founded by Olaf, who was well known in the crypto community to be the first Coinbase employee. Even more notably, the hedge fund raised money from the top venture capital investors in the world (literally): Union Square Ventures and Andreessen Horowitz.
I predict this is only the beginning of a trend we will see further solidify in 2017, i.e. more and more traditional financial industry players will be attracted to crypto, and not just Bitcoin. Of course, I think Bitcoin will continue making progress with the Wall Street types, but crypto will not be left behind too far. There is enough money to be made, and I think the finance-types smell blood in the waters.
'Collective Funding Instruments'
This is another trend that has become apparent in 2016, and I predict will become even more important in 2017.
Until now, crypto investors were individuals who knew and understood the space (or thought they did). They may have been independently rich, or just crypto-rich, like early Bitcoin adopters. But there was no collective instrument or vehicle through which you would invest broadly in 'crypto'. After all, crypto is made up of what like 800 different cryptocurrencies/assets? There's no way one person can know a good chunk about each of these.
However, in 2016 we saw the rise of collective investment instruments. This is similar to what Polychain Capital is doing with its hedge-fund structure, but more accessible to everyone. So let's discuss this trend.
First was ICONOMI. The Slovenian company raised around $10 million for their own ICO with a simple premise - it will float index funds that will trade in the market, based on cryptocurrencies, and will also have its internal version of a 'hedge fund'. These tokens will be traded in the market. Therefore, the index fund created by ICONOMI can act as a barometer for the broader crypto market, and someone could just buy that token to 'gain exposure to crypto' as an asset class. The fees are distributed to the underlying owners of ICONOMI. Now I think the team has much to learn about how indices and hedge funds work, but the idea did gain enough traction. So in the crypto markets, we now have not only individuals, but also 'quasi-institutions' like ICONOMI that will buy and sell only according to their index mandate - say they add a new cryptocurrency to their index, they will buy it no matter what the underlying fundamentals do.
Then there are informal collectives that pool investor money and invest in crypto or ICOs. The most well known among this is Coin Fund that runs a popular Slack channel for crypto investors. You can their portfolio breakdown publicly. The company published their year-end performance review which is very instructive of their model and its performance. Every crypto investor should read it to understand the state of affairs at Coin Fund. They are helping the community by doing everything from consulting to publishing research (and of course growing their business in the course of doing so).
I anticipate that the likes of Coin Fund will continue to be more and more important for the broader ICO and crypto ecosystem in 2017. This trend is pretty unmistakable - some kind of institutionalization is bound to happen when there are so many different projects and tokens that it is overwhelming for people to keep track of everything.
The Rise of Ethereum Tokens
Let's talk about Ethereum and its native tokens and how they are transforming the ICO and crypto landscape.
Many of the biggest fish in 2016 - ICONOMI, SingularDTV, FirstBlood, Golem, etc. were Ethereum-based tokens. There are several reason for this, but from a financial point of view, the major reason is simple - Ethereum investors are rich. They got rich through Ethereum's own ICO back in the day, and many are independently wealthy.
Take Consensys for example. They throw money at all kinds of projects in Ethereum, like a venture studio looking for just 1 hit. And it's not a bad strategy. They likely need just 1-2 big hits. By big hits, I mean billion dollar marketcap companies. Of course, they are going all-out with their model, and you'll find a lot of crap on the way. But if they succeed, we will likely see the first Ethereum-based billion-dollar marketcap token in 2017. The founder, Joseph Lubin, a former Goldman Sachs banker, was an early adopter of both Bitcoin and Ethereum and can afford to fund these projects and developers.
The other reason is that there are many developers in the Ethereum ecosystem, and Ethereum specifically makes it easy to write smart contracts and be a part of its ecosystem. This means there is more experimentation, more failures, but also more overall successes. We should also see more financial-based Ethereum tokens in 2017.
Ethereum also provides an easy way to create tokens, and via smart contacts, control their behavior (such as capping the ICO without having to manually process refunds). There is already a pretty large community of Ethereum enthusiasts and developers, so you can preach to the choir and still make a lot of money on your ICO.
2016 was unmistakably the rise of Ethereum and Ethereum-based tokens. ETH itself rose around 700% in 2016, although the price has been falling the last 2 months of the year. Going forward in 2017, I expect this trend to continue - more Ethereum-based tokens. I won't predict a billion-dollar marketcap token on Ethereum just yet, but I predict at least one $100 million marketcap token on Ethereum by the end of 2017.
But Not Everything is Rosy
Let's take a step back. We love what Consensys is doing for the community, but let's also be realistic. Their first token sale, for SingularDTV seems woefully behind schedule and it has high expectations built in already, which are unlikely to be met. The company published a post launch update in December that was not met kindly by the crypto community, causing its price to fall further below its ICO price.
Let this be a word of advice to everyone. No matter how smart and how well funded you might be, the field is fraught with failure. Live to fight another day.
More Legal Help for ICOs
ICOs got their moment in the sun in 2016, but what about the question of regulation? This is more applicable for US-based entrepreneurs because the country has taken such a harsh stand on new innovation in the crypto space with draconian requirements like New York's BitLicense, killing off innovation in the bud.
Therefore we are pleased to see Coinbase, an industry leader, come up with a framework that they have shared with the world. This is especially applicable to US-based crypto-entrepreneurs but everyone should read it. Coinbase has invested a lot of legal resources into producing the 27-page report, and the whole community should benefit from its use.
Coinbase is slow to add new 'assets' to its GDAX platform, but the CEO Brian Armstrong has been vocal about the rise of these tokens, aka ICOs. He hasn't backed down, and only upped his game in 2016. I can't make predictions around Coinbase's behavior, but I expect the company will continue to pivot away from purely a Bitcoin company to the broader cryptocurrency and ICO company.
Some Nascent Partnerships
We love it when ICOs and crypto communities partner with one another. In fact, HEAT itself was born out of the FIMK project, and shares a lot of the enthusiasm and community. We didn't see too many partnerships, but enough to make us wonder if there's a trend in here.
One of the bigger ICOs of 2016, ICONOMI, which raised over $10 million in its ICO, is naturally included to partner with the community at large. This is because especially its internal 'hedge fund' will likely invest in ICOs for its clients to make money. Such a move requires collaboration, research, analysis, etc. It will benefit the whole community.
The early part of the year saw two platforms launch that are both collaborative in nature. Waves allows tokens to trade on its platform, and makes it easy to create these tokens for the Waves community. Therefore new projects can benefit from Waves' technology and community (note that HEAT is doing something similar, but with higher scalability goals).
And then there were the smaller collaborative efforts as well. Lykke for example added SolarCoin to its Swiss-based exchange. It is just shy of 3000 users of its wallet and exchange service - nothing great but slow, steady progress for sure. That's usually the way we like to see things progress anyway.
Let's Talk about The DAO
Countless words have been written about The DAO debacle. Here, I just want to talk about its importance. The frenzy hasn't really died down (FirstBlood tokens sold out in 10 minutes of the ICO being open), but investors are getting more cautious. The DAO debacle also provided a reality check for smart-contract writers and authors. Finally, founders should know that greed doesn't pay well in this industry (remember when the founders submitted a proposal for several million dollars to do a security audit? Oh the irony) and it is still very much a collaborative environment.
The DAO was a one-off incident but will continue to be talked about well into 2017 and beyond and held up as a cautionary tale. We are ok with that. But remember, it doesn't represent any fundamental failures in the system. It wasn't an outright scam. It will affect the ecosystem for years to come though but don't lose hope and don't use The DAO as an excuse for not working on your projects!
So here we are, looking into a new year of 2017. Let's see what this year brings, with the price of Bitcoin almost touching $1000 right now, and the community robust if divided. Here's to a prosperous New Year and all the innovation yet to be unleashed!