As we examined in Part 1 of this blog series, The U.S. Securities and Exchange Commission (SEC), an independent regulatory agency whose mandate is to protect investors, maintain an open and fair market and facilitate capital information, tweeted its guide to initial coin offerings (ICOs) on Feb. 10. Let’s now look into the effects of this on the ICO market.
The ICO industry is being pruned
Analysts and experts in the industry have predicted that the industry will be pruned this year. At the same time, some altcoins will fail along the way while those with real value, commitment, and dedication will survive the purging by the regulatory agency and the bear market.
Here are some of the reasons why some ICOs have failed:
1. Crypto economics
A proper ICO projects consist of two parts: cryptography and economics. The majority of developers mostly focus on the cryptography part and leave behind the most important part – economics. It is now difficult to find a solid project that has a good balance of cryptography and economics.
The utility of a token refers to the function the token serves. Most tokens fail to meet their utility. A token, in some instances, can have several purposes which could help to reach a wider audience.
Some utility tokens have simply copied what already exists and have failed to offer an innovative solution that can potentially attract customers. There are so many token projects out there and investors are looking for the next big thing and not a rehash of what already exists.
Token creators must have three words in mind: role, features, and purpose.
Security is an important factor when launching an ICO. A good example is the 2014 DAO hack in which the project unexpectedly raised about $150 million in a short space of time.
It is said that the success of the project was as a result of a good marketing strategy despite the project still had vulnerabilities in its system.
Hackers exploited the vulnerability and made off with $50 million and crumbled down the project that had started on a good note.
The success of an ICO project extends beyond the fundraising campaign.
4. Lack of experience
The major disadvantage of ICOs is that anyone with coding knowledge can issue out a token. However, the success of the project depends on the experience of token issuers.
Some ICOs are launched by programmers and computer geeks who lack knowledge or experience in leading companies. Effectively, project leaders must be able to communicate their ideas to the public in a simple and convincing manner.
At the same time, token issuers are more worried about the amount of money they raise during the token sale instead of focusing on the real utility of the token.
5. Easy entry into the market
There are low barriers to enter the ICO space. This sounds like a good thing but it has negative effects in the long run. Some projects were launched without even a minimum viable product. In the end, these projects fail to deliver what they promised.
Other projects launch without doing thorough market research and along the way, they find the going tough.
Surviving the ICO market and heading into the future
The success or the failure of ICO projects affects both the investors and token issuers. This also reflects badly on the entire market which is already under pressure to paint a better image after suffering from exchange hacks, fraudulent ICOs, a bear market, etc.
Hype has subsided in the market and the only way to build a brighter future for the ICO industry is to have utility tokens that truly have a utility and propose solutions that haven’t been used before.