Waiting for the other shoe to drop

Global early-stage investment where expected to average $9.76 million per deal, meaning that ICO startups raised almost double what traditional-route startups did. Also, consider the fact that most ICOs don’t present a business plan. These startups offer investors a whitepaper that usually does not include operational and financial models, and often feature a multi-year development road map.

On top of that, most ICOs are not securities, and offer no equity or debt-instrument value. This means that the value of the token depends on the supply/demand model, which in turn depends on the viability of the underlying business and its success or failure. A lot of tokens are currently trading on the speculation of the future success of startups, but statistics suggest that many of them are bound to fail.

So, the optimistic scenario suggests that fifty percent of ICO startups will be gone within five years. Their token value should then be expected to go to zero. As most tokens are not securities, they will not entitle their owners to any compensation.

So far, $11,103.7 million has been gathered through ICOs, and given the above facts, an argument can be made that half of that capitalization should be erased in the next five years. This, of course, does not factor in the possible growth of the token value of the successful startups.

In a way, this resembles the 2006–2007 CDO market. Due to the lack of documentation requirements it is difficult for investors to differentiate solid business from shaky ones. I am not talking about filtering out pure scams, but rather about separating business that will be profitable and survive and business that will be edged out. If a business closes for whatever reason (poor marketing strategy, low margins, economy slow down, etc.) its tokens will likely become worthless.

Instead of factoring in this risk, the market appears to be doubling down. However, when companies start to attempt to realize their road-map goals and fail for a variety of reasons, the market will be forced to correct.

Given the speculation around the blockchain space, the correction could be even more drastic. It is important to remember that ICO projects are just startups, and their likelihood to fail is extremely high.

Disclaimer: This is strictly a personal opinion and should not be considered as investment advice.

If you have any questions or need consulting or advising services, you can get in touch with me by sending an email to: ilya.abugov1991@gmail.com

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