Welcome to Crypto
Welcome to Crypto: could smaller ICOs be better?
These three letters recently changed the crowdfunding market forever. In 2020, Initial Coin Offerings (ICOs) raised $ 96 million globally. Last year, this amount increased to $ 4 billion. The mood was jubilant, but with such impressive growth rates, expectations became higher and higher. So where does the ICO market go from here?
The crypto sphere is a whole new world with its vocabulary. We often hear terms like “private round”, “testnet”, “soft cap”, “fork”, etc. To early crypto believers, these terms are already well known. Wall Street merchants have generally been able to learn quickly, due to the similarities with the existing financial vocabulary. However, for the average retail investor, it has been a bigger challenge.
To serve a broader audience, we will explain the ICO process in simpler terms.
Welcome to CryptoLand
Let’s imagine someone has a plan to open a theme park called CryptoLand next to Disneyland Paris. In addition to the fantastic attractions, what makes CryptoLand unique? The only means of payment accepted within the park will be Crypto-Dollar tokens.
These Crypto-Dollars act as “utility tokens”. In other words, the currency is issued by a company that can then be used to buy a good or service offered by that same company.
CryptoLand founders will need to raise money to build their theme park. Suppose, according to your calculations, you need $ 10 million. How can they raise such a large amount of money? They can start issuing Crypto-Dollars today and sell them publicly. Instead of giving up equity, they can pre-sell tickets they would have sold at the theme park opening. As a result, they can maintain full control of their business while financing the construction of the park.
If not for this “pre-sale”, these Crypto-Dollars would have been sold at the park entrance or online. Once inside the park, tokens would be the only means by which visitors could pay. Subsequently, any Crypto-Dollars sold would correspond to the park’s future income.
The strategy employed by CryptoLand is exactly what happens in a typical “Initial Coin Offering”. Essentially, an ICO is a method of fundraising using cryptocurrencies. A number of cryptocurrencies are sold in the form of tokens to investors in exchange for legal tender. The tokens sold are the future functional units of currency if the ICO funding objective is met and the project is started.
Going back to the CryptoLand example, the next question is how to raise $ 10 million through this ICO. CryptoLand would not be successful if they only focused on park visitors, like families. Normal families (“Users”) will only buy some Crypto-Dollars (“Tokens”) just before going to the park to enjoy a day with their children. To raise $ 10 million, CryptoLand needs to approach investors (“Traders”).
As we argued in a previous article, Ripple: The new token functionality gives XRP a floor: “These [merchants] are buyers who hold the currency for the sole purpose of making a profit from their ‘investment’. This category of Actors is not about token utility. Rather, they are based solely on price and hopes for future gains. ”
To attract such investors and be successful in their ICO, CryptoLand will have to present two things: 1) its business plan (“White Paper”), 2) the return that investors will be able to obtain from their tokens.
ICOs generally take place in multiple rounds, limited in time and supply, with different discounts depending on the round. The first offer is normally the cheapest. Once all rounds are over and all Crypto-Dollars are sold, these tokens will be quoted on one or more exchanges and the price will vary based on supply and demand.
Let’s imagine that a few months later, the ICO is a success and CryptoLand has raised $ 10 million to reach its goal (“Hardcap”). The founders have kept their promise and built a fantastic theme park near Disneyland Paris. So far, everything has gone as planned and the park is about to open its doors for the first time.
So far, Crypto-Dollars have fluctuated on an exchange as investors have speculated on the price based on their personal analysis.
As soon as CryptoLand opens, a new player will hit the market: families (“Users”) who want to visit the park. Since all Crypto-Dollars (“Tokens”) were previously sold during financing (“ICO”), those visitors have no choice but to buy them from the exchange where they are already trading. This is great news for investors (“Traders”) because it brings new demand to the market. If the demand is large enough, the price of a token will increase.
1) The founder’s issue Crypto-Dollars (“Tokens”), which have been identified as their future earnings.
2) Investors (“Traders”) buy these Crypto-Dollars (“Tokens”) during a succession of sales rounds (“ICO”)
3) The founders keep their promise, build CryptoLand (“Project”), and families (“Users”) come to market to buy Crypto-Dollars (“Tokens”) to use on their next visit.
Why supply is important
During the ICO process, we identified CryptoLand as the sole provider and investor as the primary source of token demand. As we said earlier, this initial token supply launched by CryptoLand corresponded to the company’s future revenue. Thus, the Crypto-Dollars sold during the ICO were the same ones that would have been sold to visitors at the theme park entrance.
The amount of tokens sold is crucial. Consider, for example, that each visitor is expected to spend an average of $ 100 within the park. Here are two possible options:
1) CryptoLand sells $ 1 million in Crypto-Dollars. This translates into ten thousand visitors who buy the Crypto-Dollars they need. The price of the token will increase according to the ancestral law of supply and demand. If CryptoLand grew in popularity, investing in the ICO would have been a smart move. In perspective, Disneyland Paris receives 41,000 visitors per day.
2) CryptoLand sells $ 10 million in Crypto-Dollars. This represents one hundred thousand visitors who buy Crypto-Dollars they need. If the ICO was able to sell that many tokens, the message is that investors are very optimistic about the idea. After all, this would imply that one-day Cryptoland would be able to attract 2.4 times more visitors than Disneyland Paris.
Conclusion: small ICOs are hidden gems
Taking Etherum as a benchmark, the ICO market has lost more than 67% since January 1, 2018. Individual tokens have lost even more.
However, there are fantastic projects to be launched. The price of these ICOs is often attractive given that the market has plummeted.
Some projects, due to lackluster marketing, have lost their ICO goals and raised far less than expected. The low supply of these tokens in the market makes them particularly interesting investments for an opportunistic operator.
In conclusion, don’t underestimate the value that small ICO projects could bring you. They can be much more profitable than those with a larger issue. Rather than getting stuck in “hot” ICOs, we prefer to search for the smallest, most hidden gems.