Crypto Fluctuations for ICOs
This is a topic that is rarely addressed by the development teams after an ICO, but is very important and affects how the project will perform in the future. The question is simple - when will the funds be 'liquidated', i.e. when will the money raised in an ICO be converted into some other currency.
This is deliberately vague. People think that the only conversion that needs to happen is from 'altcoins' to 'Bitcoin'. But that isn't true. Even though many projects use Bitcoin to pay their developers, not many will work for a fixed Bitcoin salary. Can you imagine not knowing your salary at the end of the month even with a 50% margin of error? Usually, the teams get paid in Bitcoin converted based on the existing Bitcoin exchange rate. The salaries are usually fixed in local fiat.
So now there are three challenges to the ICO teams when it comes to liquidating:
- What do you do with your own native token that you hold for your team, after the ICO (usually 10-20% of total coin supply).
- What do you do with all the altcoins raised in the ICO? How do you start converting them to Bitcoin or local fiat?
- What do you do with all the Bitcoins, which is usually the predominant means of raising money? Do you convert them into local fiat, and if so, how?
For some projects, there is a fourth element of conversion between fiat currencies - such as when ICONOMI raised money in both USD and EUR. We'll ignore this for now, since the fluctuation in USD/EUR rate is much lower when compared to BTC/EUR.
The question of conversion is very important. Take a project like Augur, which was quite hyped up when it was launched, and many people got in on it. This was before the whole ICO hype/bubble of 2016, and they raised a respected $5 million. However, at that time, Bitcoin was near its low of $250 (now over $630) and Ethereum was hovering around $1 (now more than $11). There is no indication of what the Augur team did with their crypto funds, but if they liquidated right after ICO, they would have lost out on a return of over 10x. That's huge.
Projects could either benefit by holding on to the crypto that they raised, or they could regret doing that. No one can predict the market of course, even the "experts".
And I'll argue that it is futile for ICO teams to try and time the markets, trying to predict if it will go up or down. The teams shouldn't have hubris that just because they are involved in the crypto-industry means their prediction on short-term price movements will be better than the market.
So here's what I propose: teams should do an asset-liability management for the first few months, at least until launch. The liabilities include salaries/money paid to everyone working on the project. This includes developers, social media interns, project managers, logo designers, etc. Then add all the other costs for the ICO, e.g. PR campaigns for the ICO, sponsored posts, banner ads, etc. Then add any ongoing business costs, from rent to software products that you buy for your business. Add all these up. Make sure you have enough liquidity to ride through this period. This should be in local fiat.
With the remaining amount, you can take a higher risk without endangering your project. This is the money with which you should try to ask yourself if you know the project might do well in the future to keep an altcoin instead of selling. Use your knowledge only with these funds, not the ones that you do need.
This is a rough framework for ICO teams to think about.
The altcoin market prices have cooled off, and in fact are in a bear market right now. Most altcoins, appcoins, tokens, whatever you call them, have been on the slide. Even recently released tokens that were released with a lot of fanfare, have dropped.
Augur, for instance, opened at over $140 million marketcap but is currently half that value. The big surprise comes with SingularDTV, which is Consensys' first project with an ICO and the founder Joe Lubin is personally involved. It raised $7.5 million in a matter of 10 minutes after the ICO started, but now trades at a little under $8 million. This to me shows the market cooling off the hype.
The really good projects with solid teams and solid tech that are in it for the long haul will continue to do well in the medium-short term, but crypto traders are today feeling the pinch - the ones who buy today to sell tomorrow.
ICONOMI, another recent project on Ethereum has also concluded its ICO but is yet to release the token due to the latest attacks on Ethereum.
And people are awaiting Zcash's release - though not an ICO, it can be mined by enthusiasts.
Ethereum continues to run into problems since the DAO debacle and the forking of the network. This time, there is a sustained DDoS attack on the Ethereum network that is causing many clients to crash or take up huge amounts of memory. As developers rush to stem the damage, the attacker comes up with new attack vectors. This will be interesting to watch. It is also causing projects like ICONOMI to delay their token launch on Ethereum for the second time.
As if one issue wasn't enough, the developers have announced another hard fork in Ethereum! This one is for EIP150, which will increase the gas cost for some operations on the Ethereum network. However, it appears that this fork will affect many existing contracts on Ethereum that will no longer work. So much for a 'decentralized world computer'.
Keep an eye out on Ethereum. It is the largest crypto after Bitcoin, and many projects are being built on top of Ethereum now instead of Bitcoin. It is an important part of the ecosystem.