After the ICO Boom- will STOs be the new ICO?

For the past years, Token Sales have been a trending topic - not only in the crypto sphere. They proved to be a well working method to raise funds for Blockchain startups. Whereas traditional investments were mostly equal to a purchase of a share of the company, tokens can symbolize various things. As of now, crypto assets launched in coin offerings can be divided into three kinds of digital assets:

1. Payment Tokens
2. Utility Tokens
3. Security Tokens

Payment Tokens are the purest form of cryptocurrencies because they just fulfill a monetary function within an ecosystem. They are mostly used for transferring the value that they represent according to supply and demand. For example, those tokens can be utility tokens. This means that they are an essential part of the company’s product and they can be utilized within the product’s ecosystem.

Utility Tokens enable access to use-cases within the company or the company’s product(s). Utility tokens, as well as Payment tokens, are issued and sold to investors in a process called “Initial Coin Offering (ICO)”. An ICO is a method for companies to raise capital offering crypto tokens that have a certain use case.

A newer form of tokens is Security Tokens. Those are comparable to traditional company shares or assets with certain rights being given to the investor. Security tokens, therefore, aim to tokenize traditional assets. A token sale of Security tokens is called “Security Token Offering” (STO). STOs are currently on the rise and many people consider it the next big thing after the ICO boom. Launching a STO currently means higher legal hurdles and a higher level of uncertainty due to a missing regulatory framework. Many legal and regulatory questions are still to be cleared by the regulatory authorities. Nevertheless, the first STOs in Europe have already been launched and many more are expected to launch soon.

In this context, the question arises if the rise of STOs will make the role of ICOs obsolete? Are there still opportunities in the ICO market despite arising alternatives? Which ICOs are still worth to invest in?

This is definitely not the case! As we will see in the following, both - STOs and ICOs - are a legit form of company funding because they specialize in different aspects. Investing in cryptocurrencies has always been a turbulent undertaking. ICOs have been common among many crypto enthusiasts. Despite the belief in a project, the main motivation was the hope of making fast profits with ICOs. Most investors were successful with their investments because basically every project they invested in was giving high returns after a short amount of time.
Even though the fact that most everyone knew that it is risky to invest in ICOs, which can result in high profits but also losses of money, the crypto hype was real in 2017. The following market crash in early 2018 still came as a big shock for many investors. It turned out that the phenomena of ICOs have often been misused as a vehicle to collect an unreasonable amount of money. Wrong promises and exaggerated soft- or hard caps have been on the agenda in many of the ICO projects.

This led to a more realistic mindset among investors. As a consequence, the quality of ICOs necessarily had to improve in order to attract new investors. Due to their previous bad experience with crashing crypto markets, investors were increasingly less lightheaded as before and chose the projects they invest in more carefully. As a result, the ICOs of the year 2018 collected on average less money than the ICOs in the year 2017. The total volume of funds collected by ICOs still rose by 13%. This shows that the total amount of ICOs still rose but the volume for each ICO on average was lower. The latter supports the already stated hypothesis of too high soft- and hard caps of previous ICOs. In addition to that, accomplishing a successful ICO needed companies to offer more and more information within their Whitepaper to persuade potential investors.

As pointed out before, Security Token investors buy some sorts of rights that are connected to the ownership of the token. Due to the high similarity to traditional assets, Security tokens are a funding method for companies that want to give securities for their investors. This has many advantages for investors, for example, better price stability and therefore less volatility in value due to the token’s intrinsic value. However, security tokens are not necessary for business models that just plan with a utility use case for their token.