Disclaimer: It is important to note that data about ICOs reflects merely an approximation of reality. Results may vary strongly depending on data sources and data quality. For example, some sources may include funds raised by not-yet-finished ICOs in their data while others do not. Furthermore, specifically with historical ICO data, the deal size of the Initial Coin Offerings in USD denomination changes constantly over time with fluctuations of exchange rates, as most ICO teams hold (parts of) their investments in crypto. I have included links to the sources for all charts below for you to re-examine the underlying data.

First, let us examine how the number of ICOs has changed in the past months.

Source: icodata.io

In March 2018 we saw, for the first time since December, a growth in the number of ICOs being conducted. The number of Initial Coin Offerings grew 28% MoM to 168 ICOs. This only includes completed tokensales, excluding canceled or unsuccessful sales. As many ICO investors have probably already experienced, the increasing number of ICO projects makes it more difficult to spot the signal in the noise.

Proper due diligence and an investment strategy / focus is getting increasingly important to prevent loss of funds due to overpromising or fraudulent projects.

I believe that these circumstances combined with an increasing shift to regulated security token offerings is creating a strong entry barrier for unsophisticated retail investors which will only be reinforced throughout 2018. Sophisticated and institutional investors will likely have to put in more work to identify the most profitable investment opportunities, having investors increasingly look for anchors of trust and indications of quality.

Source: icodata.io

As seen above, beginning of January through the end of February saw a decrease in the number of ICOs being conducted. However, these project showed increasing average funds being raised so far. Essentially this indicates that few ICOs stole the show and closed bigger deal sizes while the number of smaller ICOs decreased.

This trend has been broken….

In March, we saw more ICOs that raised less on average. The total amount of funds raised in March also decreased significantly. This is most likely explained due to the adverse market conditions (bearish market sentiment), as the ICO market is strongly correlated with the overall crypto market, represented by the price of Bitcoin in the chart below.

Source: icodata.com / coinmarketcap.com

Let’s take a look how profitable investing in ICOs actually is and how it changed during the past 15 months.

Source: icodata.io

The chart above gives the impression that investing in ICOs is getting increasingly unprofitable. However, this chart has to be taken with a grain of salt. This is mainly because investments, such as bottles of wine, get better over time by their very nature. (A 10-year investment yields on average higher returns than a 1-month investment.) So even though, the 1 USD invested in an ICO in January 2018 might still only be worth 1.05 USD today, this might change a year down the line. So the chart above is basically comparing apples and oranges. And yes, this was the last food analogy for this piece.

To get a clearer picture of the average historical performance of ICO investments we need to include the time factor into the equation. The chart above shows the classic definition of returns on invesments which is:

We now adjust this equation by taking the n-th square root of the ROI, with n being the average time since the ICO has ended. In our calculation we used months since the close of the tokensale.

This results in a slightly different picture.

Source: icodata.io

While the curve is still sloping downwards and the average monthly ROIs of ICO investments conducted in 2018 is still significantly lower than in they used to be in 2017, the difference is not as drastic as with the non-adjusted ROIs.

However, this is still only part of the story…

Opportunity Costs

The performance of an investment always is relative to alternative investment deciscions. So we need to define the relevant investment strategies to compare the above developments with. Even though the average ROI of Initial Coin Offerings has turned negative in the past months, we might as well have experienced similar results when investing in stocks, gold or any other asset.

Arguably the most relevant opportunity costs that affect ICO investments are (I) keeping the money in fiat currencies and (II) investing in existing cryptocurrencies.

The former is rather simple; the ‘return on investment’ of holding cash is always 1x (or 0%). For simplicity I have choosen Bitcoin as a representative for the second investing alternative as data shows that all major cryptocurrencies are strongly correlated with each other and especially with Bitcoin.

Source: sifrdata.com

In the charts below I plotted the return of investing in Bitcoin by calculating the average monthly price of BTC (based on daily close prices) and comparing them with the average price in March 2018.

Source: icodata.io / coinmarketcap.com

The charts above allow us to define for each month in 2017/2018 whether

  • investing in ICOs,
  • investing in Bitcoin,
  • or hold cash

resulted in the highest returns so far.

In 10 out of 15 months, investing in ICOs was on average your best bet. During two months, you should have bought Bitcoin. And since January 2018, the ideal strategy would so far have been to just do nothing and keep your money in cash.

However, in the mid- to long-term, this does not mean that it was necessary the best decision to not invest at all in the crypto-market during the first months of 2018. Although returns on both Bitcoin and ICO investments are affected in the short-term by the current market correction, looking at the last three major corrections in July, September and November shows that ICO investments specifically still turned out very profitable over time. In fact, these months are local tops in terms of profitability today, indicating that bear markets might even be the best time for mid- to long-term investors to invest in Initial Coin Offerings.

Source: icodata.io

Past data even showed that the lower the monthly average price of Bitcoin was, the higher was the average monthly return on ICO investments.

If you take anything from this piece it should be:

While it is enticing to invest when everything is going up, it might actually be more profitable to invest into ICOs when the market is down.

However, we are still only about a year into the boom of Initial Coin Offerings and thus histrocial data supporting this assumption is still limited.

Product Management @ Gnosis // Opinions are my own and not the views of my employer

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