There are numerous reasons why the market is punishing crypto, and more specifically utility tokens.
Below are some of the major factors which have led to the crash.
Flawed Business Concepts:
While there are some valid projects in the space such as Factom, and Stellar, most projects are either outright frauds, or at the very least, awful business concepts.
I’ve been contacted at least twenty times by different projects who plan on being ‘Uber on the blockchain’. In this case the business model features paying drivers in cryptocurrency so that they can cut out the middle-men.
I initially inform these Uber clones that General Motors, Tesla, Uber, and Lyft are all planning on releasing autonomous vehicles within 5 years. Afterwards, I proceed to ask how they plan on tackling this challenge. Generally, they have no answer. In other words, they plan on disrupting Uber by paying drivers in crypto, while Uber are busy disrupting themselves by removing drivers.
Another example are projects which advertise themselves as ‘AirBNB on the blockchain’. Ask how they plan on marketing and they have no idea. They somehow expect the average consumer to want to purchase bitcoin, transfer the bitcoin to an exchange, purchase the companies token, and then transfer that token to the ‘AirBNB clone platform’.
This is not user friendly to simply book a holiday. If you ask these companies how they will monetize, often it involves the value of their tokens increasing. A sloppy business with no actual business plan, one example of this are Bee Tokens.
Nowhere do these ICOs validate how they will market the product, or how they plan on earning money. The reason is that 90% of these companies have no intention of earning money from the business, they only look at raising money from the ICO.
The same could be applied to dozens of other verticals which ICOs claim to disrupt such as advertising, affiliate marketing, data storage, esports, healthcare, etc.
While there will be some bad businesses conducting STOs the numbers will be reduced. Institutional investors will be more demanding, and the added regulatory environment helps ensure that STOs are more transparent.
There are 2 types of businesses that raise money from ICOs. The fraudulent ones which have the goal of raising money and hyping the product, and regular start-ups.
Start-ups operate on a tight budget, they carefully measure the burn-rate, and attempt to stretch raised capital as much as possible. Funds are used on payroll, rent, and other operating expenses. They cannot afford to pay 40 BTC to list on HitBTC, or up to $3,000,000 to list on Binance.
Meanwhile fraud projects ‘invest’ raised funds into listing fees. The ICO reserves some of the raised capital for marketing, and the rest is kept as profit for important assets such as ‘lambos’.
Who does the market reward?
Often, the market rewards the fraudulent companies which can afford to pay exorbitant listing fees. The success of an ICO is dependent on marketing and hype instead of actual product adoption or market penetration.
Exchanges should be profiting from trading, not from listing fees. Credit should be given to Bittrex for being one of the few exchanges with no fees. Legitimate security exchanges will not charge anything more than basic listing fees, ensuring an even playing ground for legitimate businesses.
The theory is that forks are evolution, there’s a disagreement between management, and both parties go their own way to then ‘fork’ the code. The best fork then wins.
While there is some validity to this theory it causes numerous issues as outlined:
- Market Confusion – The average consumer considers purchasing bitcoin. Now they must somehow learn to differentiate between the various versions which include: Bitcoin Gold, Bitcoin Diamond, Bitcoin Dark, Bitcoin Cash ABC, Bitcoin Cash SV, Bitcoin Private, and Bitcoin.
- Dilution of Brand – If there were 15 versions of Apple products by 15 different companies named Apple, it would dilute the value of the brand. The same applies to Bitcoin or any other fork. The more forks, the more the value will decrease. The worst thing that happened to Bitcoin was Bitcoin Cash.
- Magic Money – The entire concept of Bitcoin is that there’s a maximum limit of 21 million coins. Every fork then teaches the market that this maximum limit is arbitrary, as you can keep on ‘forking’ or duplicating this 21 million into infinity. It destroys the limited supply concept.
Digital securities cannot be forked, this ensures the integrity of the brand and removes market confusion.
There are two problems with Bitcoin being as volatile as it is currently is.
- When the price begins to crash, merchants do not want to accept it. Some industries are super competitive with tight profit margins, they cannot afford the risk of accepting Bitcoin unless it’s converted immediately to fiat.
- When the price escalates as it did in December 2017/January 2018 the opposite problem occurs. Consumers do not wish to spend Bitcoin as they know they are losing money, instead this price escalating causes hoarding behavior.
Both above problems cause market friction and deter user adoption. Stable Coins which were the first true security tokens can solve this issue.
Hacking and User Error:
Using cryptocurrencies is difficult and unforgiving. It requires storing private keys, hoping that the keys are never compromised, and that the user will never make an error. It requires humans to be perfect and to behave like machines.
The average person does not want to be stressed out by losing private keys. This alienates anyone who is not tech savvy and who does not live and breathe crypto.
Cryptocurrencies are an area of vulnerability for merchants. They know that if the funds are hacked, they can never be recovered. This begs the question, why would they bother with the risk? It’s one thing to worry that a bad staff member might empty out a cash register for $500, it’s something else to worry about them stealing 1000 BTC.
This same problem is why institutions are not wanting to invest in crypto. When you are dealing with a billion dollars in volume, the last thing that you need to worry about is a potential $200 million heist.
I do not foresee any type of real market adoption for any token unless it has some type of KYC baked into it.
Security tokens solve this problem, they have KYC baked into the token which means if the token is stolen, that compromised token can then be destroyed, with a new token being reissued to the rightful owner. This simple feature solves the issue of hacking, lost private keys, etc.
Institutional money has seen the writing on the wall when it comes to utility tokens for many months now. They have reduced exposure to these assets to focus on tokenized securities. This has further driven down the price of most utility tokens.
While it is undeniable that there are many issues outside of the 5 that I have highlighted, I believe that these are some of the fundamental problems which have led to the market crash. Digital securities in the form of security tokens will be the next wave of crypto.
Security Tokens End 2018 on a High Note
2018 has been a wild ride for the world of blockchain. The industry began the year at the peak of an unsustainable bubble. As a result, it is now finishing the same year at what many believe to be the bottom of the market – Meaning 2019 has tremendous upside.
Potential growth in the digital securities sector is a major part of that potential upside. 2018 saw a crack-down on ICOs and an amazing amount of fraudulent tokens. However, 2019 promises to deliver functional products that are regulated, liquid, and secure.
A Year in Transition
There was a clear transition away from ICOs throughout the year, despite a record amount of funding being brought in through them. However, it is important to remember that a select few ICOs raised a good chunk of the total money gathered.
This transition can primarily be attributed to the Securities and Exchange Commission. While warnings from the SEC began much earlier, it wasn’t until mid-2018 that they actually began to enforce regulations. For instance, it was here that eyes really began to shift towards security tokens.
There is a race to develop user friendly platforms, for both potential token issuers, and investors alike. While there are many promising platforms that have jumped into the fray, here is a look at the two leading the way – One in North America, the other in Europe.
Securitize (North America)
- This company immediately comes to mind. Led by CEO, Carlos Domingo, Securitize recently received over $12million in funding from industry stalwarts such as Coinbase.
- Services offered by Securitize have seen more adoption than most. Companies such as Spice VC, 22x Fund, Blockchain Capital, and Augmate, have all turned to Securitize in some capacity.
- NeuFund is well poised to continue gaining traction, having just completed their own STO. Figures from their own token sale were double of those expected.
- This platform represents, perhaps, that with the most adoption in Europe. Neufund has at least 10 companies lined up to complete STOs.
One thing is certain – 2018 was a productive year for product development. With this out of the way, 2019 should see the adoption and usage of these services.
An increased focus on security tokens has led to increased scrutiny on the viability of certain protocols to provide the needed security and efficiency. In other words, by recognizing that simple ERC-20 tokens would not work as securities, multiple companies decided throughout the year to develop their very own protocol, tailored specifically towards the digital securities sector. For example, here is a look at a couple of those standards:
- Developed a variation of the ERC-20 token standard, known as ST-20. This standard has seen minor industry adoption, as it provides the necessary security and transparency features necessary in the digital securities sector. As development continues, Polymath finds their protocols evolving with the advent of ERC-1400.
- The Harbor platform has already gone live. This means that token issuers are able to utilize the in-house standard known as ‘R-Tokens’. These regulated tokens represent Harbor’s bid to become the industry standard for protocol use.
2018 was most definitely a year primarily noted for its development of industry infrastructure. With this in mind, there were multiple instances where companies capitalized on this burgeoning sector. Here are a select few STOs that took place, and were successful in 2018:
- Raised $18 million through the sale of digital securities representing equity in a luxury Ski-Resort
- Raised $12 million through the sale of digital securities representing shares within an incubator fund for start-ups working in blockchain
- Raised $134 million through the sale of digital securities representing fractionalized ownership of tZERO. Above all, a company that specializes in integrating traditional finance and blockchain services.
2019 and Beyond
Overall, 2019 is shaping up to be promising for not only digital securities, but for the blockchain industry as a whole. Industry fundamentals have never been better. In addition, infrastructure is rapidly being developed which will support the next boom.
Looking back, we have seen the launch of a variety of platforms, and multiple STOs successfully hosted on them. In addition, we have seen the creation and adoption of various token standards. Furthermore, we have seen a steady increase in excitement towards this burgeoning sector.
Closing out 2018, here are a few words from Brian Armstrong. Speaking at TechCrunch 2018, he commented on the future of digital securities, stating, “It makes sense that any company out there who has a cap table… should have their own token. Every open source project, every charity, potentially every fund or these new types of decentralized organizations [and] apps, they’re all going to have their own tokens,”
5 Ways to Invest in the Security Tokens Revolution – Opinion
Many investors believe in the transformative power of security tokens, but they do not know how to get financially involved.
Outlined below are options for investors. The goal is to fund the platforms, issuers, and companies which will be the market leaders of tomorrow.
As a disclaimer, I am an equity or token holder in all the investments and platforms listed below. These are not ranked in any order. No financial compensation was given for this article.
Bnktothefuture – Signing up for this platform is the easiest way for investors to get involved.
Lately Bnktothefuture has been featuring projects involving digital securities. One notable raise was Securitize.io which recently offered 20% equity for $8,000,000. This is the same Series A that was led by CoinbaseVentures, and Blockchain Capital.
This is the easiest way for investors to get access to phenomenal equity investments. Bnktothefuture is also developing a securities exchange platform, which will only enhance the value of the platform.
Polymath – This is a market leading token issuer, with some of the most strategic marketing in the industry. Many STOs are using this platform issuer. You can purchase the utility token from major exchanges such as KuCoin, Bittrex, and Binance.
This is by far the fastest way to gain exposure to STOs via a utility token.
StartEngine – This is a phenomenal crowdfunding platform which runs its own conference the StartEngine Summit. One notable STO raise was tZERO which is currently the most anticipated digital securities exchange set to launch in 2019.
While there are many STOs on this platform, what is more important is that StartEngine is currently running their own STO.
The raise amount is very fair considering the market traction they have gained. The STO raise is for $10,000,000. Since this is for accredited investors only, the minimum investment is $10,000.
Click Here to learn more about the StartEngine STO.
SPiCE VC – This is a venture fund with access to many security token platforms. SPiCE offers exposure to the massive growth of the Blockchain/ Tokenization ecosystem.
As of this writing the portfolio includes access to Saga an upcoming stable currency, Slice a platform for real estate, ROX the first dedicated exchange for security tokens. And Securitize.io, one of the leading token issuers.
SPiCE is currently trading on Open Finance.
NeuFund STO – This is another token issuance platform. They are currently the market leader in Europe. The softcap has been reached and the hardcap is €6,608,091.
You can view complete details about the Neufund STO on this page.
While there are other ICOs, and STOs that offer exposure to the space, the above are in my opinion the best positioned to gain traction in 2019. As a note I am not an investment analyst, the above information is based on my own personal investment philosophy and does not consist of investment advice. This is for entertainment purposes only.
Securities.io is not is not licensed by or registered with the U.S. Securities and Exchange Commission, FINRA, or any other financial services regulator. Specifically, Securities.io is not a FINRA registered Broker Dealer and does not offer or sell securities, or engage in any other Broker Dealer activity. Nothing in this website constitutes an offer, distribution, solicitation, or marketing of any security.
Furthermore, Securities.io is not an exchange, alternative trading system, escrow agent or transfer agent. Securities.io does not provide legal, accounting, tax, or regulatory advice, or hold custody of any cash, virtual currency, security token or other digital asset for or on behalf of any third party.
Launching our Security Tokens Listing Platform
It’s been over a month since we launched securities.io, and this past month has seen more progress in the security token space than the previous year combined. More companies are launching security token offerings in order to raise capital. Meanwhile ICOs are dying a slow death, with the SEC becoming even more aggressive in cracking down on ICOs.
In the meantime even conferences are refocusing. Start Engine rebranded their biannual conference from ICO Summit 2.0 to the Start Engine Summit. In this case the entire summit catered exclusively to security tokens. The same can be seen on the Start Engine platform, less ICOs, and more STOs.
It’s not just Start Engine, I see the same similarities in other conference in the space. More time is being devoted to STOs, ICOs are basically the left over pitches that are seen in the second half of the last day after the serious investors have gone home. ICOs are basically pitching to other ICOs.
My inbox is becoming bombarded with companies that have cancelled an ICO launch, to instead focus on launching an STO. They’ve all but given up on a utility token being used on the platform, or if there is a utility token, it’s a secondary stable token.
At securities.io we want to be more involved in the space. We initially had the mission of being a securities news platform. Now we want to go further. We want to be a listing platform that will list all security tokens. We also tell you who is powering the security token (such as Securitize.io, Polymath, Neufund, etc.) This is all in the hope of making the space more transparent.
We are also working on partnerships with different listing platforms, token issuers, and STOs, in order to make securities.io more useful.
You can expect more interviews so that you can learn about actual STO businesses. We also plan on launching a “Thought Leaders” section which will enable market leaders in the space to communicate directly with investors. This will never be to pitch specific tokens, instead it will be a venue for them to share their thoughts and how they are seeing the securities space evolve.
Lastly, we are working on launching a section called “STO Launch“. This will offer detailed information to companies who are considering launching an STO, but who are still confused about the entire process.
In the meantime you can view our new tokens listing platform.
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- TokenMarket to Host Security Token Offering February 16, 2019
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- Globex Licences ATS Platform to First Growth Funds Limited February 15, 2019
- REMCO Software to see Security Tokens Listed on LATOKEN February 15, 2019
- Magic BlockchainQA to Collaborate with Securitize February 14, 2019