Q1 2018: A Winter of Crosscurrents in a Developing Market

A casual glance at the amounts raised totals for Q1 2018 suggests an uncomplicated progression for the industry, as the rate of growth in amount raised via token sales continues to accelerate. Q1 2018 saw $6.57 billion raised via 217 sales, another new fundraising record and an increase of more than 50% from Q4 2017’s $3.9 billion from 306 completed sales raising more than $25,000. This result saw the industry lifetime total token sale amount raised increase to more than $14.2 billion. Despite these headline’s numbers suggesting a simple narrative of uninterrupted growth, several more subtle trends indicate a more complicated reality, including an expanding bifurcation between the most successful sectors and projects and those attracting fewer projects and less funding, undoubtedly influenced by the complex combination of themes including unsettled markets, questions of technological progress, and uncertain regulatory contexts.
 


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While the increase in amounts raised is undoubtedly impressive, the declining number of quarterly sales hints at a potentially more nuanced reality. Identifying the influence of the largest sales in increasing the overall raise and average sale amounts is straightforward, for while the number of sales declined nearly 30% from the previous quarter, the average sale amount nearly tripled, to just over $30 million.
 


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Somewhat surprisingly, the median sale amount doubled as well, an unexpected increase suggesting the outsized influence of a handful of the largest sales was accompanied by some compression at the lower end of the market, where the number of smaller token sales also declined. A chart of sales completed by raise band comparing Q4 2017 with Q1 2018 highlights this point.
 

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Despite the decline in the number of lower end sales, those sales raising less than $5 million, the continued strength in the middle tier, those projects raising between $5 and $50 million, nevertheless remains a highly encouraging indicator of the overall condition of the market and a trend we have observed for some time. This positive sign is worth noting, as it is easily overlooked amidst the relative distraction of a handful of massive, headline-filling sales.
The graph below, with the monthly amounts raised grouped into their respective token sale raise bands, provides a sense of the increasing contribution of large sales towards overall industry amounts raised over the recent months. Close followers of the sector may have already intuitively sensed this, given the well-publicized sale rounds completed by Telegram (two rounds of $850 million, in February and March) in addition to EOS’s substantial raises of $750 million and $500 million in the first two months of the year. While these outsized sales effectively produced a topheavy market dominated by the few largest sales, with a corresponding reduction in the lower tiers’ contributions, the market’s middle tiers notably remain fundamentally healthy, both in terms of completed sales, as noted above, as well as funds raised, as can be seen below. With more than $1.3 billion raised by projects in the $5 – $25 million tier during Q1 2018, and an additional $1.3 billion raised by the $25 -$50 million tier during the same period, projects clearly continuing to find backing.
 


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That said, the increasing contribution of the largest sales into the overall industry raise amounts clearly represent a new dynamic for the space. Whereas the increasing prominence of middle-tier token sales, those roughly between $5 and $50 million, marked the second half of 2017, large token sales raising more than $250 million increasingly played a bigger role in the overall amount. Making this tier’s broader role all the more striking is the fact that it only came into existence in September, when Filecoin’s $262 million raise became the first to surpass $250 million. Whether this trend of outsized sales continues to build during 2018, or recedes as market activity resumes focusing on the middle tiers, will surely be a key part of the narratives that will define 2018, both in terms of amounts that are ultimately raised within the industry and in terms of the types of projects that assume prominent places in popular discussions of the space.
In terms of sectoral distribution, smart contract platforms overwhelmingly outraised other sectors in terms of the distribution of Q1 2018’s raised amounts. The relative percentage of overall funds raised in the quarter by projects developing smart contract platforms was 54% of total amounts raised across the industry as a whole. While the smart contract contract sector has consistently received the largest percentage of funds by sector, its relative percentage of overall amounts raised was only 23% of total token sale funds through the end of 2017. The significant increase seen in Q1 2018 is another result of the few overwhelmingly large sales that marked the quarter.
 

 
Thinking geographically, Q1 2018 saw the funds raised distributed amongst the usual jurisdictions.
 

Market Activity
To describe market conditions as challenging during Q1 2018 would be a considerable understatement. It is a powerful indication of the token sale market’s continued strength that projects were able to raise such substantial amounts amidst the turbulent conditions and with markets generally declining throughout the quarter.
In terms of market activity, what is particularly striking was the high degree of correlation amongst market performance between various cryptoassets. The chart below illustrates this by looking at the network value of a handful of the largest cryptocurrencies, but the correlation extends across much of the entire sector, where relative outperformance was rather exceptional.
 

 
A twelve month perspective suggests this correlation is hardly unusual, although this time-frame does suggest ‘Bitcoin is to gold as altcoin is to silver’ is an apt analogy.
 

 
Whether a maturing market begins differentiating among different projects and tokens having unique challenges and growth profiles, or whether it continues to largely trade as a highly correlated group, will be a central question as 2018 progresses as it would be a clear indicator of a maturing market.
Central Themes of Early 2018
Beyond both the trends and particularities of the token sales space and the market performance of various cryptoassets, several themes both animated and hovered over the sector during Q1 of 2018. Amongst these were the larger context of crypto markets, the technical state of the industry and particularly the too-often unfinished nature of most projects, and the larger regulatory background that was shaped by its own trends and tensions that too often went unremarked. Looking more carefully at these themes suggests both several questions and key issues likely to substantially contribute to shaping crypto markets throughout the remainder of 2018. Specifically:
 

Market Conditions: Incessant talk of bubbles, busts, and outright frauds have undoubtedly contributed to the pullback of early 2018. That said, given the size and strength of the rally in the second half of 2017, a substantial pullback was to be expected, and was hardly dependent upon a chorus of critical voices to serve as a trigger. An arguably more likely input is the tax implications of 2017’s market performance. Beyond that, however, evidence of the fundamentally healthy nature of this pullback is readily apparent, especially when considering the above-noted funds entering the space, the massive inflows oriented towards Telegram and, arguably more substantially, the broad range of smaller, mid-tier projects that compellingly speak to the range of parties interested in investing in the space.

 

State of Projects and Technologies: The state of the projects and technologies in the crypto space exercises considerable influence in two distinct ways. One is the relative lack of “completed” or functioning projects amongst those having already completed token sales. This is neither surprising nor disappointing in itself, for projects take time to build. However, the reality of more than $14 billion having been raised with few projects actually completed and operating does represent a bit of headwind for the new projects looking to complete their own sales. This is likely a reason behind the decline in the lowest tier of small sales that marked Q1 2018, which are particularly dependent upon retail participation. The second aspect of the technological overhang currently facing the market is simply the amount of core technologies currently being developed, from scaling to sharding to consensus and cross-chain interoperability, not to mention the flurry of activity to develop functional, cost-effective stablecoins. This wide range of fundamental issues remaining unresolved and with research and development ongoing is considerable. Until positive, deployment-ready solutions emerge to these questions other developments will necessarily remain on hold as projects planning to employ elements of those solutions extend their own timelines. Conversely, progress on these issues throughout the remainder of 2018 could provide a meaningful boost to the sector should these anticipated developments be completed as anticipated.

 

Regulatory Setting: The core tensions outlined in Smith+Crown’s September 2017 Overview of Regulatory Developments continue to shape the regulatory context in critical ways. That article observes how official stances towards token sales and cryptocurrencies more broadly were shaped by both regulatory bodies’ foundational concerns of protecting investors but also the desires of states to attract economic and innovative activities in general, and to profit from the technology-related opportunities afforded by the crypto sector. As forecast, the resulting tensions have continued to be a central animating aspect of regulatory and political action and commentary. Even as different official agencies explore and even implement blockchain technologies, headlines have fretted about (or applauded) threatening declarations aimed at cryptocurrencies. On the largest level the result has been that while enforcement actions directed at cryptocurrencies have done little more than enforce existing laws or halt obviously fraudulent activities, with some prominent exceptions, the broader advance of states exploring and implementing different aspects of blockchain technology continues unabated. More interestingly, and as observed in September, the willingness of states to welcome cryptocurrencies and related activities for both the taxable opportunities it represents and the broader start-up activities that promise new economic inputs, continues to be a major theme. We suspect that as 2018 unfolds the trend of states welcoming crypto and the innovative economic activity it represents to expand beyond already welcoming jurisdictions that so far include Gibraltar, Malta, and even France, which, as the economic minister recently described, is interested in welcoming ICOs with a specifically created regulatory regime intended to make France a leading destination for cryptocurrency.

 
Conclusion
Overall, from a more immediate perspective Q1 2018 is perhaps best thought of as an extension of a number of trends that marked the second half of 2017, including rising sales amounts and a large proportion of raised funds being dedicated to much-needed infrastructural elements such as smart contract platforms. The regulatory context also seems to be an extension of many of 2017’s core themes, with frightening pronouncements emanating from politicians and regulators around the world. Despite these apparent continuities, a number of observations from the early 2018 market hint at substantial evolutions underway. Included in these are a decline in the smallest, retail-funded ICOs even as large, (generally) well-developed projects continue to find substantial funding opportunities, often from a professional investor class becoming increasingly interested in or comfortable with the space. On a regulatory front, various beginnings of an openness to the sector, and to partially mainstream the sector so as to enable its innovations to continue, and even to welcome them in particular jurisdictions, also hint at subtle shifts taking place. The overall result is that while early 2018 has looked much like late 2017 in many regards, other more subtle trends hint at the emergence of important new trends that might be expected to play increasingly larger roles as 2018 progresses.
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