The Relationship Between Initial Coin Offerings & Ether Prices

Demand for ICOs and the price of ether are highly correlated but their relationship is a bit more nuanced.

It’s no secret that interest in initial coin offerings (ICOs) is high. In fact, there has been so much capital flowing into these token offerings that they may well be driving, to some extent, the price of ether itself. ICOs have been becoming both more numerous as well as larger, in terms of capital raised, as many start-ups have come to view them as an easy way to raise capital.
The ICO process shortcuts many of the hurdles of raising funds for a blockchain-related project. Instead of pitching to a group of accredited investors, all that is needed is a website, a whitepaper, and a simple smart-contract to collect funds and distribute tokens. Not just is the process easier, but the exposure is much greater; anyone with an internet connection can invest. Estimates are that, year-to-date, almost $1.4 billion dollars have funneled into projects via ICOs. This is more than five times the amount raised during the entire year of 2016.
However, it’s important to note that over the same period, ether prices have absolutely skyrocketed from an average price of $9.79 in 2016 to reach as high as $400/unit in 2017. Ether is currently valued at around $300 at the time of this writing.
With the value of ether rising so much, it becomes difficult to discern whether prices are causing increased ICO activity, or whether increased ICO activity is leading to higher prices. Which is the cart and which is the horse in this scenario?
As is usually the case with these sort of questions, it’s a little bit of both. The Ethereum network is very new and just came onto the already crowded crypto scene in 2015. After a rocky first year and a half, interest in Ethereum began to pique around the end of 2016. Having survived a hard-fork after the DAO collapse, the network was showing strength and even the promise of being a truly powerful platform upon which the distributed web could be built.
As prices began to climb from around $10 at the beginning of the year to the mid-20s and 30s, many who were early adopters of ether began to see the value of their holding climb significantly. At this time several new and promising projects were offering token sales creating the opportunity for more profits as well as a bit of perceived diversification.
The funneling of these newfound gains into token-based projects caused the price of the tokens to appreciate and, in doing so, incentivized more investment by those who had missed the initial offerings. Those on the sidelines wanting to participate in these rapid gains now needed ether to do it and the only way to get ether was to buy it on an exchange with either bitcoin or fiat currency. The end effect is that, as value represented in the market cap for ether was migrating into token markets, a vacuum was created on the other side drawing new money into ether.
Since most start-ups that received ether for their tokens likely haven’t converted all of it to fiat, a lot of ether was essentially taken off the market for the time being, almost as if being held as a deposit for the tokens. Eventually much of this ether will probably be cashed out, but, for the moment, the sheer speed at which ether is being captured via token sales is outpacing the speed at which it can be liquidated. Once the pace of token sales begins to slow down, we may see a decline in the price of ether as a result.

What about the recent crash?

It seems like bitcoin plays a role as well. In the weeks leading up to August 1st, the price of bitcoin began to decline as investors moved to the sidelines to see what would happen. As bitcoin prices dropped ether prices fell in sync. There’s no way to be sure why ether remains so correlated with bitcoin but, to some extent, it likely has to do with how ether is purchased. Before ether began to be added to major exchanges, the only way to purchase it was by first buying bitcoin and then exchanging it for ether. As traders needed to liquidate their bitcoin or move it off exchanges due to the possibility of a hard fork, this likely had a chilling effect on the demand for ether, all else held constant.
As the price of ether declined, there was a corresponding drop in both the number and, perhaps predictably, the total value of ICO offerings in July. The fact that the number of offerings decreased is a possible sign that those projects offering token sales anticipated a weaker market for their tokens and responded by adjusting their timing.

Now that the Bitcoin scaling debate is mostly behind us, it seems likely that more ICOs will soon follow. A bump up in offerings through the rest of the year would not be unexpected now that the price of ether has returned to the $300 level.

Can ICO activity be used as a predictive indicator for ether prices?

Given the circular relationship outlined above, it is unlikely that ICO activity can be used to forecast ether prices. If one were to make the assumption that ether markets were reasonably efficient, a big assumption to be sure, any announcements of major offerings would very quickly be incorporated into the price of ether. For example, if a highly-anticipated hypothetical project called XCOIN were to announce that it would begin offering tokens next month, traders would immediately bid up the price of ether in anticipation of the forthcoming demand from those intent on participating in the offering.