Increased regulatory scrutiny of Initial Coin Offerings (ICOs) coupled with the the recent slump in cryptocurrency prices, in particular throughout the month of May has made investors wary of the asset class. Indeed, the most popular digital currencies by market cap including Bitcoin, Ethereum, Cardano and NEO all finished last month significantly lower.
The plunge has also led to a visibly stalled market even though many digital tokens moved marginally higher as June began.
Since the start of 2017, ICOs became an ever more popular way for crypto and blockchain start-ups to raise funds. During that time there were a record number of ICOs, the cryptocurrency world's version of initial public offerings (IPOs). However, as has been previously covered, the number of more recent ICOs has slowed, arguably because of lack of regulatory clarity. In addition, fear of illegal activity or even outright fraud has fueled investor concerns, possibly suffocating demand for new offerings and driving down prices of existing tokens.
Overly Adversarial Regulation; Fragmented Investors
Shane Brett, co-founder and CEO of GECKO Governance believes that's exactly what's been happening. While there has been an enormous increase in the number of ICOs launched in 2018 compared to 2017, the crypto market nonetheless does appear to be sputtering. Brett thinks there are many reasons for this, but the most conspicuous is the uncertainty relating to how governments and regulators view the industry.
Regulatory bodies, which were previously skeptical of the sector, for example, have recently signaled harsher views on ICOs. Equally vexing, a number of cryptocurrency aficionados have expressed concern that certain regulatory approaches which "misunderstand blockchain technology" are too adversarial; or that those which insert the regulator “inappropriately into the creative process” could lead to “bad regulation.”
Brett thinks much of this can be attributed to growing pains for a relatively young asset class. However, he offers another theory as well. One possibility for the recent swoon is that investors are buying up cheap offerings, then sitting on their holdings in anticipation of future market volatility which would make their current investments much more profitable.
"As the world of tokens and ICOs is still in its infancy, determining an appropriate regulatory framework surrounding the ICO and crypto market, and determining the shape of transactions within the sector, will take shape as they mature is of paramount importance.
It is also highly likely that large institutional investors are moving into the crypto market, particularly with the emergence of crypto funds, anticipating volatility as regulatory announcements emerge and hoping to take advantage of a bear market. However, as more ICOs adopt a regulated status, it is likely that longer token retention periods by holders will reduce volatility in the marketplace, slowing the exponential growth which was previously seen in the crypto market.”
Gabriele Giancola, co-founder and CEO of qiibee sees the market as more fragmented. It's his view that investors in the crypto space are divided into two factions: those who truly believe in the market’s overall progress and thus buy-and-hold, in hopes of ROI that's thousands of percent more than their initial purchase price, versus those who want to get in and out quickly with reasonable, albeit not necessarily stratospheric, profits.
“You have investors who take into consideration the short term volatility of the market and do short investments or trend investments based on an insight or analysis. They are trying to detect when the next hit or fall will come and hence they invest and leave fast.” says Giancola.
Richard Ettl, co-founder and CEO of the Smart Containers Group, a Swiss company using blockchain technology, believes what we are currently witnessing is the maturation of the ICO and crypto market so that what's on offer is evolving, alongside longer commitments from ICO investors as one of the stipulations of initial purchase.
“Increasingly, token issuers are implementing lockups, which result in longer investment holding periods. Additionally, it is becoming increasingly apparent the market is beginning to move away from the “utility at all cost” offering, with more and more blockchain projects beginning to offer stakes in their company or financial dividends to ICO contributors and token holders.”
There also appears to be reconsideraton by ICO and alt-currency investors regarding portfolio timing and reallocation. John Lyotier RightMesh CEO says up till now, people who invested in digital tokens were looking at too short of a timeframe for their crypto and ICO investing. He compares the current shift in thinking to the way conventional retail investors typically purchase a mutual fund or equity and re-evaluate each holding with their financial planner on a quarterly or even annual basis.
Lyotier says of most participants in the crypto asset class: "Now everyone is a day trader. It is absolutely critical to understand that building these platforms and protocols is complicated and it takes time and skill to build them for long-term success.”
It's possible that the idea of buying and holding cryptocurrencies is still an alien concept to most participants in the alt-currency market who have grown used to buying and flipping. And for good reason says Evgeny Yurtaev, CEO of Zerion.
The capital raised via ICOs goes to develop often complex technology or ideas that take time to play out, says Yuraev. That makes it difficult for many to hold something unproven longer term, in the service of a still nebulous concept. In this way it's the exact opposite of IPO markets, Yurtaev explains, where financial regulations limit offerings by smaller, riskier companies. Most of the companies doing an initial public offering already have an established business. “Therefore, there are clear productivity gains for investors," he says. "The crypto market is still too uncertain and fickle, which makes long-term investment more complicated."
But as a savvier group of investors enters the crypto marketplace, including many who aren't in it to get rich quick, Pavel Roytberg, co-founder of Doctor Smart is certain strategies and time horizons are in transition. With governments all over the world looking to regulate the ICO phenomenon and find workable ways to make it part of the existing financial systems, Roytberg believes we're not seeing a swoon but rather the playing out of an evolutionary process.
“This is causing the market to adapt to ongoing regulatory requirements or consider alternative routes. As well, investors have changed their approach from buying everything within their reach to more careful selection of projects for longer-term investment. If they purchase tokens, they no longer dump all of them once the lock-up period ends. Finally, the ICO geography is changing—promising projects originate from different regions, as do new crypto investors."
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