Most ICOs will fail. I’m certain of that. Here is a better article about the specifics of why ICOs will fail. Anyone with the proper understanding of history and economics knows that most ICO will fail. Since legally, you cannot issues coins as equity or securities like back in the dot com IPO days, people are issuing ICOs as a token for transacting within their own ecosystem. This turns out to be even better for companies because they can raise money without diluting ownership. The major problem is that all the tokens have no real use right now. People are creating a token for products that either have no traction or do not even exist; perhaps they have a plagiarized white paper that has never been peer reviewed.
No Use Case
While creating an ICO meets current demand for assets that will make people cryptomillionaires, there is no demand from real users who will make those companies real money. The economics is faulty because the demand for the product via the token comes from gamblers, so called investors and people with a serious case of FOMO. If your business did not need a token before, why would it need it now?
The main problem is the confusion of demand for a token compared to the underlying product. You cannot confuse demand for a token which is completely unrelated to your product. ICO demand is purely for speculation at this point. You cannot create true demand for a token for a product or service that people do not want either. It’s pretty clear that most companies and some con artist are using ICOs or tokens to take advantage of the greed of ICO speculators to raise money for a business that may or may not come into fruition.
Added Friction to Adoption
Now let's assume that you are not a con artist and you are actually building a real product with some degree of value. Some people will claim that by creating tokens, it will build a community for their product. If you have a product that could not gain traction through the multitude of proven methods, then creating another layer of friction will not help! Making users to buy a token will only make it more confusing and difficult. Obviously there are exceptions such as gambling and gaming where tokenization will only help the ecosystem because tokenization helps people spend more. But for most products, it does not. You can give away tokens for people to try your services but why don’t you just give people free fiat credit? Isn't that easier?
Also if people need to get more tokens, they will have another layer of friction since obtaining obscure tokens are still confusing. Using fiat currency was not a problems in the first place. This is another level of friction for current users. If you are developing a platform or marketplace with buyers and sellers, sellers will have to take your tokens than convert to fiat which adds friction and conversion risk for sellers. This becomes another pain point and more friction to your product.
Token Volatility and Price
In the event, that all your hard work has created a nice active ecosystem and perhaps you do have a product or service that requires tokens, users would be turned off by tokens with the market volatility. Since the current or main use case is for speculation for the large majority of tokens, the price for tokens move dramatically daily which the value of people holding the token for actual use to be victims of loss in value. Your real users are victims of trader and speculator price manipulation. Or if people start liquidating the token after lock up periods or after a nice pump and dump, real users will suffer losses unrelated to their actions.
Now let's look at another situation, your platform works out and it is becoming increasing popular, then the use of the token will be in high demand so you’ve solved the use case problem. However a new problem will appear, people will horde the coins for capital appreciation. This will cause problems for the actual use case token holders who have to pay more for services and products. As a result of the high prices on your network for products or services, it will lower demand causing lower participation; crushing the momentum!
The Truth Behind Most ICOs
But let’s not beat around the bush. Let’s call ICOs what it is. In kind words, most of it is fraud. It is a way to raise money for products and services that do not need tokens.
I can forgive you for doing it because compared to doing hundreds of pitches and bootstrapping, doing an ICO is a gift from the gods of capitalism. Your business does not need to pitch to angels or VCs. You don't need to live off ramen and sit in a non ergonomic chair that you found off the street. Heck, you don’t even need a real product. Money is being thrown at you.
There is absolutely no rational reason not do an ICO in this current market. It is the rage. There are people screaming for new coins so they can get in early and sell for massive profit. The system is incentivizing everyone to do it. Law firms can make tons of money for their fees. ICO technology companies can reap huge fees. Advisors can get valuable coins for free. Insiders can make easy money with free or heavily discounted pre ICO prices. Early investors can turn early access to a discounted ICO into 10X return in a month or less. Early traders may make 2-5x with initial bumps on exchanges. Even the most ethical is tempted with the fast cash and lambos. If ethical people are doing it, then definitely the morally challenged will be ramming down the ICO doors.
Founders ICO Dilema
There is no incentive to build anything once the carrot is gone. You can raise this money and say you’re going to build a product while in reality, you are paying yourself a generous salary and fold when you run out of money. But rush to the finish line when you're already there. Or if you’re a crypto con artist, you can take the money and leave the word “penis” on your site to celebrate your con of greedy uneducated rent seeking crypto “investors.”
Founders can become instant millionaires when they sell their newly formed coins for fiat. The incentive to even build a product or a viable business is gone once you get paid. But let’s say you’re moral and understand what ethics are, you can do your time because there isn't much motivation to ship a product. Or maybe you're busy planning how to enjoy that crypto fortune. If you have a long lock up period, you can ship a half ass product and still meet your milestones because guess who wrote that white paper and those "tough" milestones? You did! But that's only if anyone actually read that plagiarized generalized piece of crap called a white paper.
In the end, if you issue coins for something that never required a token, the value will go to zero. No use equals no value. When the only demand is not from use case demand but from speculators, it will fall. Speculators will find the next potential earth shaking ICO. Then the house of cards for that ICO will fall and the price will go to zero; leaving those poor bag holders penniless and filled with shame along with bouts of anger.
There are hundreds of house of cards out there. In the end, will it destroy Ethereum and cryptocurrencies? Will it bring down the revolution by destroying the most important thing to the system, trust? If we destroy the trust in decentralized blockchain, it may take down everything good about it.