Comparing The ICO And NFT Booms

ICO and cryptocurrency marketplaces are characterized by enduring trends and transitory fads, according to both insiders and outsiders. Some crypto-innovations maintain market dominance and investor mindshare, while others fall quickly and unceremoniously. ICOs and non-fungible tokens are two prominent crypto developments (NFTs).

This post will discuss the Initial Coin Offerings and NFT booms and why NFT markets won’t crash. Topics include:

ICOs’ rise and fall, NFTs’ rise and fall
ICO vs. NFT Booms

ICOs’ rise and fall

ICOs were formerly a blockchain-native way for new protocols to fund their initiatives. ICOs sold project-specific tokens for ether and bitcoin. These coins would be presented as having some utility in the project, giving Initial Coin Offering investors early access to the protocols. ICOs were hailed as a potential to democratize early-stage venture funding because to their minimal entry hurdles. Web 3 founders without access to traditional VC money could benefit from global crypto-focused crowdfunding.

Not all investors bought tokens because they wanted to use the underlying projects. Due to the flywheel effect, which transfers protocol adoption into price rises for the linked token, many investors bought tokens to profit from future price appreciation after the project’s launch. ICOs’ low entry hurdles and unregulated nature made them a prime target for scammers who preyed on inexperienced investors.

ICOs flip the usual process of obtaining finance through VCs or public markets, as this summary shows. Unlike non-crypto enterprises, which are valued based on product-market fit, traction, and scalability, crypto protocols during the Initial Coin Offering bubble were valued solely on hype and token liquidity. ICOs can create market interest with just a whitepaper, generating remarkable prices without market demand. In the non-crypto world, ideas are sometimes worthless without competent execution, yet the ICO market seems to emphasize ideas above execution.

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The MasterCoin layer-2 system, now called Omni Layer, raised $500K in BTC in the first formal Initial Coin Offering in July 2013. The Ethereum protocol raised initial funding in July 2014 by exchanging 60M ether for 18.3B BTC. Augur completed the first ERC-20 ICO, raising USD$5.3M for 11,000 REP. ICO market craze didn’t start until early-mid 2017. The market’s enthusiasm for ICOs and the potential upsides of various tokens spurred innumerable companies to multi-million-dollar fundraising and some to multi-billion-dollars. EOS and Telegram Open Network (TON) raised USD$4.1B and USD$1.7B, respectively, after its inaugural runs.

ICOs reached amazing heights in early-stage project fundraising. In June 2017, Initial Coin Offering fundraising for Web 2 startups topped traditional VC funding, with USD$550M raised vs. USD$300M through angel and seed VC investments. In July 2017, ICOs raised $300M while traditional VCs deployed $200M. By the end of this ICO growth era, total funding had topped $1.6B. TokenData reports cumulative ICO funding between January 2017 and July 2018 at USD$17.8B.
The ICO market was riddled with bogus projects that exploited naive investors for financial gain. Exit scams were common, with millions of dollars squandered on ICOs for fake projects. The imaginary developers stole the money and disappeared with their fortune. Kik’s KIN token was the most prominent unregistered security. By passing the Howey Test, many tokens violated US securities laws, exposing the project’s development team to SEC lawsuits (SEC). Ponzi scams and pump-and-dumps were other ICO frauds.

The ICO craze collapsed for several reasons. The macro climate around the crash in 3Q18 was unfavorable and has since been dubbed the ‘Crypto Winter’ A hostile regulatory climate aiming to penalize perceived misdeeds and dissuade further exploitation of naive retail investors also contributed to the crash. The US SEC was forceful in taming the ICO sector. The SEC fined EOS and TON’s development teams USD$24M and USD$18.5M, respectively, and required TON to repay USD$1.2B to its investors.

The 2021 NFT boom began between February and March. After market activity and token valuations cooled, a surge began in 2H21. The greatest evidence of why the market erupted in 2021 may be the record price rises in the wider cryptocurrency market. Bitcoin and ether had year-to-date price growths of 800% and 2,100% at their respective peaks in late 2020 and early 1H21.
Consider the following performance measures to better understand NFT market growth in 2021 and compare it to ICOs:

End-1H21 NFT market size: USD$2.5B. This is up from $13.7M a year ago.
Beeple’s Everydays: The First 5,000 Days sold for USD$69,346,250, the most expensive NFT sale ever.
1Q21 NFT market growth: 2,627%. This increase continued into 2Q21 with 111% QoQ growth, and the market is anticipated to grow further by 3Q21.

NFTs are a blockchain-based innovation similar to ICOs. NFTs were meant to enforce digital scarcity and prove ownership of immaterial assets using blockchain-based tokens. NFTs have not been immune to the same greed-driven and value-destructive practices that bloated the ICO market with scammers. Several collections have been created as money-grabs and blatant copycats of successful NFTs. This has flooded the NFT market with speculative coins without aesthetic integrity or practical functions. Whether NFTs collapse due to another Crypto Winter and greater regulation is unknown.

ICO boom of 2017/18 and NFT boom of 2021 have numerous commonalities. The two manias have innumerable similarities that may give an outside observer the impression that their eventual destiny will be the same.

The absolute volume of funds raised through ICOs has eclipsed that through NFTs, as shown in the graph in the first part of this article. Both supercycles saw tremendous interest and investment surges.

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ICO investors likely outnumber NFT investors. In late August, there were 16,000 daily active unique NFT wallets. Monthly, wallets ranged from 24,000 in August 2020 to 280,000 in August 2021. Little data exists on daily or monthly ICO investors, although research suggests the average ICO had 4,700 participants, many of whom spent tiny sums then flipped their tokens before the project’s launch. The average monthly number of ICOs from June 2017 to June 2018 was 98, implying that ICOs averaged over 460,000 monthly investors, more than NFTs.

Despite these commonalities, there are major differences between the two market booms that suggest NFTs will last longer than ICOs. NFTs will replace ICOs as a primary application of blockchain technology and crypto-assets for two reasons:

NFTs are realized, existent assets. ICO investments were speculative bets that the development team’s project objectives would become working products. In many situations, developers can raise millions in ICO fundraising with just a whitepaper. No MVP or market traction was required for a successful ICO. Due to low entry barriers and mindless market behavior, 60% of ICO-backed firms collapsed within four months, leaving investors with worthless tokens. Such speculative future bets were bound to fail. When NFTs are bought, their success doesn’t depend on resource management or team cohesion. Whether an NFT appreciates relies on market dynamics.

NFTs act as a community’s calling card and don’t promise more than that. The NFTs with the highest valuations have benefited their communities the most. This is best illustrated by NFT-based avatars, which gain value as more owners flaunt them online as a sign of crypto-wealth. CryptoPunks and Bored Ape Yacht Club are two avatar projects recently valued in the hundreds of thousands of dollars thanks to their communities’ network effects. In contrast, numerous ICOs were established to raise money for unrealistic projects. Skycoin was a speedier, cheaper Bitcoin alternative. The technology that reportedly enabled the speedy and cheap transfer of Skycoins was never deployed, and the apparent speed of transactions was due to the network being centralized on a single server. Other promised features, such a tumbler method to ensure privacy, were likewise false, and Skycoin’s market fell. Many ICOs didn’t realize their visions.

NFTs have never aimed to evade legal and regulatory systems. NFTs give a mechanism to enforce the scarcity of unique, infinitely replicated digital goods. NFTs can provide sole ownership of digital files and secure ownership transfers by employing blockchain technology. NFTs extend tangible asset ownership, not traditional laws and regulations. ICOs, while altruistic in their goals to enable money access for less-advantaged startups, avoided the legal and financial hurdles of traditional VC or capital markets funding. By using ICOs, founders can avoid IPO filing and registration requirements and VC ownership dilution. ICOs’ backhanded and brazen attempts to undermine regulators led to their demise.

ICO and NFT booms have certain similarities, however it’s doubtful that the NFT industry would fall as badly as ICOs.

The foregoing analogies between NFTs and ICOs don’t indicate the NFT boom will persist forever. NFTs will remain an important part of the crypto markets post-crash, unlike ICOs. Once the token fever settles down and the volume of new initiatives slows, NFT markets will benefit from the clarity and stability of more mature blockchain applications.

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