ICO Mania Revisited: The Investors and Token Issuers Who Made Good

Four years on, it's time to reappraise the initial coin offering (ICO) era, and the easiest way to do it is by looking at investors’ portfolios.

There's a certain class of crypto denizen who derides anything that isn't bitcoin as garbage, and the long bear market that started in early 2018 certainly seemed to support that view. We're in a different time now where much of the work funded by the largest ICOs has been deployed. Those products now have at least a base of users and their token prices reflect it.

Most of these projects haven't hit their speculatively driven early 2018 highs, but they are far above their bear market numbers. For a certain class of investor, that means well above their token pre-sale prices.

Just to recap, the ICO was a way to raise a lot of money from the public by selling some kind of blockchain-based token (a secondary cryptocurrency that runs on a distributed ledger that also has its own native coin). ICO tokens didn't carry with them an ownership stake in a company, instead they were meant to provide access to some service later on.

(For example, a Netflix token might be good for one month of Netflix viewing.)

It wouldn't take long before the public started getting shut out of these sales for legal reasons, but the amount of money raised didn't slow down at first as deep-pocketed investors picked up the slack. According to CoinDesk data, projects raised about $5.5 billion through 2017 and $6.8 million through the first part of 2018, when the party came to a screeching halt.

Many of these tokens were released to the public at the end of their sales, even though they couldn't do anything useful yet. That didn't matter. People would still trade them. But when word came out that the regulatory sharks were circling this funding model, prices across the crypto market tanked and didn't recover for a long time. That was the beginning of Crypto Winter.

Nevertheless, startups found other ways to distribute tokens, such as offerings on exchanges or on automated market makers (AMMs) or by using smart contracts.

Unsung comebacks

Quickly checking a few of the biggest early ICOs: Augur's REP (probably the first ICO for a token) is trading at $25.53, though it spent the bear market between $10 and $20 (often below $10). Bancor's BNT is trading at $3.63, this despite failing to trade above $1 from November 2018 to June 2020. 0x's ZRX is trading at $0.86, a price it fell below in August 2018, not to see again until this past February.

Tezos's XTZ is doing well. Brave's basic attention token set a new all time high in this bull market and sits right now in striking distance of its last one.

Of course, everyone's gotten a big bump as the overall market went up, everything is – after all – very correlated, but the difference today is those things were largely just ideas then and they are products now.

A few still seem to be struggling. KIN's price remains something like it's always been and Status's SNT also looks like it can't catch the old spark.

Still, by and large the big projects that raised most of their funds up front by selling off a token for usage before there was anything to use (almost always in lieu of selling equity in the company) don't seem to have cut and run and are starting to find markets.

This goes against the received wisdom in the broader crypto culture, where the term ICO has become a dirty one.

Capital formation transformation

Not everyone sees it that way now, though.

"I think ICOs regardless of their regulatory status just conceptually represent a new technological way of forming capital," Jake Brukhman, founder of CoinFund, said. In particular, he noted, the venture capital world tends to follow certain scripts or heuristics that can make it hard for new ideas to get the resources they need.

"What the ICO boom allowed us to do is allocate some capital to some ideas that seem crazy," Brukhman said.

Keld van Schreven, a cofounder of a European digital asset investment company, KR1, took it a step further. "I think it's the greatest funding mechanism we've ever invented," he said. "It was like a really beautiful house party but it got gatecrashed by people that ruined it."

KR1 has invested in the data product Bluzelle, the blockchain ecosystem Cosmos and, in particular, it went very long on the platform for funds, now known as Enzyme but formerly known as Melonport, among others.

He continued, "The impact of the ICO boom is first of all it created a lot of attention and a lot of marketing around digital assets. One could argue that if you didn't have that cycle we wouldn't be where we are today in terms of mindshare."

Brukhman said, "Our first fund, it definitely operated during the ICO era. That launched in July of 2015. ... [I]t was very small and experimental. It actually did very well." CoinFund bought projects like Augur, Filecoin and NuCypher, as examples.

"It's only this year that some of the assets, like Dfinity for example, came to fruition," Brukhman said. While declining to go into detail, Brukhman made it clear that this first fund has been a success.

Human frailty

Everyone acknowledges that a lot of bad projects and bad actors took advantage of the approach before long, but van Schreven said that from where he sat there were also a lot of well-intentioned projects. To him, it wasn't hard to tell which had potential and which were obviously nonsense.

But people are good at talking themselves into bad decisions when there's a boom. "It's the frailty of the human. People want in on something blowing up," he admitted.

Gregory Di Prisco launched a fund in 2017 called Distributed Capital, which persists to today but in a different form. "We saw the opportunity set as: 'There's this new type of asset on Ethereum, and there's only 5 of them now we think there's going to be a lot more," he said.

The new asset was tokens, most of which would follow the ERC-20 standard. There were hardly any when Distributed started, but Di Prisco and his colleagues knew more would come. Even if Ethereum proved to be hopeless, Di Prisco said, they viewed it this way: "We are almost certainly going to be right about the desire to buy them and trade."

At that time, he said, there were hardly any tokens yet and few other funds participating in them. Very few pools of money funded by limited partners had rules that allowed for anything like cryptocurrency. Di Prisco said the playing field at that time for pre-sales and early ICO bets was limited.

Across the various investors we spoke to, the leaders in token purchases early on seemed to have been Polychain, Pantera, Fenbushi Capital, CoinFund and, to a lesser extent, the Digital Currency Group, because it still preferred equity deals. (DCG owns CoinDesk.)

Strength beyond strength

Pantera Capital launched a fund then known as the Pantera ICO Fund, which has since rebranded to the Early-Stage Token Fund.

Pantera partner Paul Veradittakit said in a phone call, "We felt there was an opportunity to create a fund just to invest in projects that were releasing tokens," but to do so early on, in pre-sales and before the project launched.

"We figured people could access Bitcoin and Ethereum so we figured, just do an exclusively early-stage projects for investors," Veradittakit said.

That fund was easily filled and it remains an open-ended hedge fund, with over $1 billion assets under management. It has continued to make active investments so it's not limited to the ICO era, but it still holds a large quantity of tokens from that time. It has investments in ZRX, FIL, DOT, OGN and other early projects from that era.

The fund has made itself an active participant in the communities it has invested in. "We are staking. We are providing liquidity. We are providing governance and voting, all of that stuff."

On average, Pantera holds for three years, looking at itself as a long term partner (at least on a crypto time scale), but, he said, "There are times when the returns are so high it makes sense to take a little off the table."

So it has exited parts of some positions or even made significant shifts when there are material changes in the company.

The bear market was not easy, however. "Quite a few of the tokens that we invested in 2017, 2018, hit a rough patch during the bear market," Veradittakit said. "We didn't do the flips and the dumps and things like that and therefore we had to ride through it. We actually didn't lose that many investors."

Some left, but many stuck around. The fund posted strong returns through 2020 and so far into 2021. From January 2020 to the present it is up 2,807%, according to Pantera.

‘Fund suicide’

The ICO boom days were a very strange time and one in which some of the investors we spoke to took bold moves that don't typically fall within the bounds defined by best practices for investing. For example, both Distributed and KR1 decided to go extremely long on one token (MKR and MLN, respectively).

Van Schreven called the bet on Melonport "fund suicide," though it turned out to be anything but. The MLN token for the project now known as Enzyme trades at $105. It still hasn't cracked its prior all-time high but it's well above what it sold for early on; van Schreven said KR1's investment there is up well over 1,000%. It's also up more than 10,000% on its investment in ATOM, the Cosmos coin.

The time was so buzzy that it started to attract Web 2 professionals who quickly realized how limited was the blockchain space. Brukhman contends that this was good as well. Folks who were used to having lots of developer tooling to work with found Web 3 lacked it. So a lot of that stuff got made.

Not all the investors from that era look back on ICOs favorably, though. Di Prisco's fund did very well in part because it got out of so many positions at the top. He still thinks that by and large the 2017 ICO approach isn't a healthy one.

"I think that fundraising mechanism hamstrung a lot of projects," Di Prisco said, explaining that companies should not raise all their funding up front. It forces them to put too much energy into treasury management and not enough into making something good, and if they get it wrong, they can get largely wiped out.

Case in point, messaging startup Status raised nearly 300,000 ETH in 2017 (over $100 million) but was still forced into laying off 25% of its staff in 2018.

But that doesn't mean that the ICO form wasn't taking investing in a direction that has potential.

Even van Schreven admits things got out of hand. "At the tail end of it, I think probably there was bad money allocated. The vast portion was people with good intentions," van Schreven said.

"Blockchain technology can create hyper-efficient ways of forming capital. Now, secondarily, let's go find legal frameworks for that and make it work," Brukhman said.

Still, van Schreven remembers it fondly. "The ICO should be held up as one of the breakthrough moments for technology on the funding side," he said, lamenting that "it's gone back to more of a venture capital model to put the hand brake on it."