The Crypto Market Is Tanking- But ICOs are Suffering the Most

I never thought I would say I am grateful for not having run an ICO back in 2017 when the market was super hot and money came easy, but I am. Not only have I avoided potential jail time from the risk of violating securities laws, but token prices have dropped along a roller-coaster ride steadily down, taking out much of the funds many companies have raised. With the sudden 15–20% drop in the crypto markets yesterday that came after the announcement of the BCH fork date, I can bet that many blockchain company executives are chewing their fingernails today in fear, and for good reason as the positive elements on the horizon don’t yet outweigh the downside risk factors, especially as many of these companies continue to liquidate token positions just to stay afloat.

The Future of The ICO Market

In the last six months I’ve hit major conferences in the U.S., Europe, and Asia, drumming up interest for an ICO that we haven’t opened for a number of reasons, many of them moralistic. Nonetheless, with this experience I have a pretty good idea both for what companies spent on their ICOs (from the many offers we have had to build out all the specifics necessary), and for how much companies are spending post-ICO on marketing and courting developers in a tight job market. Since the beginning of the year companies that raised large sums in ICOs have been sitting on increasingly small reserves and one has to wonder how much runway some of these companies have left! I ran the numbers recently, and a company that raised $25m worth of Ether at the beginning of this year at a $500k burn rate is looking at just three months of runway at sub-$200 Ether. For a company with a more modest $200k burn rate, if based in the U.S. or most European countries, after taxes they would be looking at only surviving through mid-2019.

These sobering numbers are assuming a company actually raised this much funding to build the company with. Many ICOs raised far less money than they publicly announced, thinking that by announcing raise amounts they would encourage investment, and it has been rumored that many companies used much of the ETH they raised to buy their own tokens, making the ICO appear more successful than it actually was. These deceptive practices has fueled many of the SEC complaints filed, leading both to the whole ICO industry standing on shaky regulatory ground, and leaving companies with much less of a budget to work with than is necessary for the innovations planned.

There are rumors that a number of companies spent tremendous funds pumping their own tokens as well. I won’t name names here, but I’ve heard stories of companies paying out large portions of the Ether they raised to 100x their token value by market manipulators. Of course now they must regret spending in that way when many Alt coins have dropped more than 90% since February all-time highs.

Another looming thunderstorm on the horizon will be the tax determination of ICO funds. In the first set of calculations I didn’t take taxes into consideration, but this could reduce the amount of working capital significantly. A second projection shows tax liability with capital losses treated as unrelated business taxable income and given a 40/60 split of short term and long term capital gains. It is arguable if this would be applied to companies running token sales, the idea was suggested by an attorney I saw speak at a recent ABA tax meeting, but not impossible. This second projection I made shows a company with a more modest $300k burn rate and taking taxes into consideration, leaving the company broke after taxes are considered. With a $300k burn rate the funds should have given five years of runway, but in the end provided less than one year once the tax burden and drop in the value of Ether is accounted for.

I’m Not As Optimistic As They Are

Everyone in the industry is extremely optimistic for a swift recovery “to the moon,” but this is unlikely. I’m an optimist in my heart, and I hope I am wrong and some companies are either bootstrapping better than this or cashed out at high prices. And it is possible for ETH prices to jump in a major way once institutional investors come in. But unlikely considering the downward pressure to sell that companies are facing in order to cover dev costs. I actually would say we are likely to have ETH pushed down in value from this, despite Ether being technically a very valuable coin for many purposes.

During the next six months as many companies square off against these issues the consistent sell-off of ETH may well even hold the whole cryptocurrency market down. Regardless, without the market magically booming in the next couple months, I predict that by the beginning of next year we will start to see a series of ICO failures as companies that raised many millions go belly-up from the shortened runway that the low price of anchor coins like ETH have spurned. However, after the market has experienced this pain we will be in a good position to see reasonable gains, and the companies that have survived will fare well.

About Crystal Stranger

Crystal Stranger, EA, author of The Crypto Island Tax Guide, has more than 15 years of tax experience, with a focus in international tax, as well as hacking code together as a hobby for even longer.

She has been writing about Cryptocurrency tax and regulatory issues since 2014. Wanting to help her tax clients who struggled with regulatory compliance, she founded PeaCounts, a blockchain accounting software company building a revolutionary new payroll system using the token PEA. This new, transparent payroll will promote fair wages and eliminate the need for black market labor.