With the recent increase of ICOs on the Ethereum blockchain, traders and investors have strong opinions regarding the crowdfunds’ impact on cryptocurrencies. Some believe that the introduction of these tokens increases demand for the underlying crypto they are based on. Others believe that this hype is powered by greed, when this bubble bursts it will leave nothing but blood behind. This article will go over both schools of thought and try to speculate on ICOs’ true impact on the cryptosphere.
ICOs Create Demand
ICOs have been trending for a few months now. We first noticed the increase of these offerings earlier this month when Ethereum’s price skyrocketed to a high of $420. When traders tried explaining the price rise, they turned to ICOs as the reason for Ethereum’s increased demand. After all, most if not all ICOs are hosted on the Ethereum blockchain for the simple fact that with the ERC20 standard it is both seamless and easy to issue tokens using a smart contract.
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In order to speculate on ICOs’ impact let’s go over the basic lifecycle of a token:
- ICO gathers funds
- Token is distributed to investors
- Token begins trading on an exchange
That is basically how every ICO works, investors look to get their return on investment at the third stage when the token hits reputable exchanges. That is when people who missed on the ICO are looking to purchase the tokens, and those that participated in the ICO are looking to cash out at a profit. How does each stage affect the underlying currency?
Assuming the ICO is based on Ethereum, during the first stage investors are usually looking to buy ether in order to be able to participate, this creates buy pressure for ETH causing upwards price movement. During the distribution stage, investors are still “holding” the ether which is converted to tokens. It is only when the token hits the exchanges that traders start selling the token back for ether. Since there is no regulation currently when it comes to ICOs, exchanges trade these tokens against the underlying blockchain currency they are based on, in this case Etheruem.
Remember that even when token investors sell their bags, they end up holding Ethereum. For someone who just made profit with ether it makes little sense to make another trade and sell it for either Bitcoin or fiat. In short, using the above reasoning we can conclude that ICOs contribute to upward pressure for Ethereum, since those that don’t have any ETH will purchase it in order to participate in the ICO, and when it comes time to sell they will trade the token back for ether instead of selling the token directly for fiat.
Failed ICOs hurt the industry
As long as the ICOs that are offered are legitimate and the projects behind them succeed, everything will stay peachy. However, when a project remains in limbo, or the funds get misused, or issues arise with the ICO, the market will be quick to react with a sharp price decline.
Take for example The DAO, Ethereum was surging in value prior to the hack trading at $21. Right after the hack, the whole community was left awestruck and the price dropped over 25% to a low of $15. If this trend of raising millions in capital for brand new projects continues, it will only be a matter of time until something goes awry and investors begin to panic. After all, it takes 100 successful ICOs to keep pushing the price up, and only 1 failed project to bring the ecosystem down.
Furthermore, as these ICOs get more and more popular, when a reputable projects comes around the whole Ethereum network crashes due to the overwhelming activity. The Status, Bancor, and even the SONM ICO are just three of the most recent examples that rendered the blockchain unusable for a period of time. For those not interested in the ICOs, unable to move funds during random times is not a good development by any means.
Creating solutions to scaling the Ethereum blockchain and services to be able to handle these ICOs is of the utmost importance to maintaining a healthy environment and a healthy price. Moreover, preventing rogue ICOs from gathering funds is crucial in allowing for the long term growth of Ethereum and cryptocurrencies in general.
Do you think Ethereum is benefiting from the ICO mania? Or do you think this trend needs to stop before another DAO scenario happens?
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