For many analysts within the blockchain and cryptocurrency space, the era of retail investing in ICOs is over. The mom-and-pop coin buyers who helped drive the ICO boom from 0 to 100 last year aren’t just voluntarily leaving the space–they’re being locked out of it. Institutional investors have virtually taken over the ICO arena.
As such, the number of investment funds that have either been designed to invest specifically in ICOs and other funds that have participated in ICOs has quietly grown. Blockchain and DLT ‘Tehcnologist’ Charles Voltron tweeted a list of over 600 such funds in mid-August.
List of ICO fundshttps://t.co/yhSdmVdFMM
— Charles Voltron (@CharlesVoltron) August 15, 2018
Brave New Coin reported that these funds are often run by a small handful of individuals: “a mix of both defectors from the traditional world of finance seeking escape from the excruciatingly low yields of bonds and equities, and famous figures from within the crypto community.”
However, the success of many of these funds has been questionable at best. And because the cryptocurrency space is changing so quickly, the behavior and success of these funds has also had to adapt fast – or fail.
And some cryptocurrency hedge funds have, indeed, failed: in April of this year, the Financial Times reported that crypto hedge funds (including some that invested in ICOs as well as more established tokens) were down by an average of 35 percent. Only eight percent of the top 25 crypto hedge funds had reported any profit since the beginning of the year, and nine funds had shut down their operations completely.
As a growing number of funds continue to fail, so too do the projects that they used to be a part of. According to a report published by capital consultancy firm Greyspark in September, half of all ICOs are failing to hit their funding targets; an estimated 890 token sales failed to raise any money at all.
So then – how have these funds had to evolve in order for funds to remain profitable? What is expected of ICO projects who are seeking institutional capital? And what’s next?
‘Crypto Funds Have Taken the Place of VCs’
The end of the crypto-mania that marked the turn of the year has caused the market to mature. Institutional investors are far pickier about the projects that they choose to fund. As such, these investment funds have also taken on an important role when it comes to validating various blockchain projects.
“These crypto funds are taking the place of traditional VCs when it comes to startup investing in that having them on board is a sort of ‘stamp of approval’ and confidence that thorough due diligence has been done on the ICO,” said Brent Traidman, Chief Revenue Officer for BRD, to Finance Magnates. BRD is a cryptocurrency wallet that recently raised $32 Million via their own token sale.
In other words, these two forces desperately need one another to survive: ICO investment funds need great projects, and solid projects need institutional investors.
Some analysts find it ironic how quickly the ‘wild,’ ‘revolutionary’ crypto space has become so similar to more traditional financial spheres – but the bend towards tradition has also invited some well-established VCs into the cryptosphere.
“From the traditional VC space, we are seeing many firms choosing to buy equity in pre-ICO companies rather than pure token purchases. The VC funds are Union Square Ventures, A16z, Sequoia, and Greylock,” Traidman explained.
Attracting Institutional Cash Means Playing by the Rules
In order to attract the cash that these funds have to offer, ICO projects are bending toward regulatory compliance more often. For example, “we are seeing a migration to security tokens from utility tokens,” Traidman explained.
“A few security tokens [have been observe] working with protocol projects such as Harbor and Securitize to help govern and manage a digital asset with legal and regulatory support in multiple jurisdictions.”
ICORanker.com publisher Jeff Koyen echoed Traidman’s sentiments, adding that the prevalence of security tokens has further contributed to the end of retail investors in the crypto space.
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“If ICOs and token sales want to attract fund money, they need to get their acts together. In the U.S., that means going the security token route,” he told Finance Magnates. ICORanker.com describes itself as “committed to being the number-one source for reliable information about ICOs and token sales.”
“Even if you can convincingly argue that you’ve got a utility token, don’t bother — just register as a security token. Unfortunately, this means you can’t sell to the general public in the U.S., but average Americans aren’t buying ICOs anyway.”
In 2018, ICO Funds Are In For the Long Haul
As ICO and STO-backed projects continue to evolve toward regulatory compliance, the ways that institutional investors treat the tokens they purchase has also begun to shift.
“Last year, funds were investing in private sale stage and cashing out either during ICO or once the token was on an exchange,” said Korporatio CEO Stefano Covolan to Finance Magnates. Korporatio is a firm that has created ‘Smart Companies,’ described as “solution that allows business-owners to have a fully legal entity on the blockchain.”
This practice was particularly profitable during the ICO boom at the end of 2017 when retail investors were more heavily involved in the space. Institutional funds and individual crypto ‘whales’ could easily profit off of making large token purchases during ICOs and then selling off their assets as soon as it was possible, causing the token price to plunge and leaving the retail investors ‘holding the bag.’
Now, with less money flowing into the space, funds may benefit from holding onto their coins for longer periods of time–or reaching some kind of compromise between ‘hodling’ and pumping-and-dumping. “The hedge funds that focus on trading, as opposed to simply being on the long side, have thrived,” BX3 Capital partner and co-founder Kyle Asman told Finance Magnates. BX3 Capital is a New York-based blockchain and crypto consultancy firm.
One thing seems to be clear – with more large institutional players contributing to the ICO space; this could contribute to greater long-term market stability.
Institutional Investors Will Stabilize the Market
Indeed, the head of Abu Dhabi’s Financial Services Regulatory Authority, Richard Teng, said to a crowd of attendees at Fintech Abu Dhabi that “Once you bring [institutional investors] into the market, you will see the prices become much less volatile.”
“But institutions only come in if you help them address the risks,” he added, explaining that regulators around the world still have a long way to go before the crypto space is properly regulated.
The crypto industry’s struggle to attain regulation is well-known. And because the space has gone without proper regulations for so long, self-regulatory behavior is not uncommon: the shift away from Initial Coin Offerings (ICOs) and toward Security Token Offerings (STOs) is just one example of this.
To be fair, the US SEC and a number of other regulatory and law enforcement bodies have cracked down on the cryptosphere to eliminate fraudulent ICOs from the space. However, when it comes to trends in industry evolution, the line between what’s been caused by outside regulation and self-regulation can be hard to draw.
Yale’s Endowment Fund Invests in ICOs: A Sign of What’s to Come?
In any case, the drive to gain more institutional investors and build more solid ICO investment funds seems to be working. As Asman told Finance Magnates, this is evidenced by one of America’s most famous institutions entering the cryptosphere as an investor.
“As we just saw in the past week, Yale’s endowment has begun to invest in various cryptocurrency projects,” he said. “Yale’s endowment is considered the standard-bearer among US endowments and we will continue to see other top-performing college/university endowments following suit—especially as we see higher-quality, regulated offerings come into the space.”
Therefore, the ICOs’ quest for high-volume investments seems to be working – at least on some level. “On their end, ICO projects are seeking out any traction they can get from high-net-worth individuals/family offices, venture capital funds, i-banks, and hedge funds.”
While Yale’s decision to invest in ICOs may have been a fluke, other industry trends suggest otherwise. The institutional side of ICO investments is still taking shape – whatever happens, the world is watching.