ICOs put downward pressure on the price of Ether in the short term, but are good for the Ethereum ecosystem in the long run.
In the wake of the ICO frenzy that has swept the Ethereum startup scene, many have voiced their concerns about the effect ICOs are having on the price of Ether. Large amounts of Ether are being raised and sold to fund these projects, which has caused the currency to see significant sell pressure.
For example, one ICO heavyweight has raised over $500 million in Ether since the beginning of it’s year long token sale. Although this is a harsh reality to deal with in the short term, the positive effect these startups could have on the value of Ethereum in the long run shouldn’t be ignored.
Good in the long term
Good ICOs can provide funding for influential projects, pulling in more attention to the Ethereum Blockchain and encouraging cross-industry collaboration. A wide variety of industries, from energy to gaming, are trying to expand into the Blockchain space, and ICOs provide the funding necessary to do so. Both established companies and startups can find opportunities to use the Blockchain relatively risk free.
Many industries are actively looking for ways to implement Ethereum. The CEO of one cloud gaming platform, Egor Gurjef, recently wrote:
“Ethereum provides appealing smart contract and payment options for a lot of industries. I think the gaming industry is no different. ICOs are a great way for companies to get involved with Ethereum without too much risk.”
Cross industry exposure isn’t the only way ICOs can add value to Ethereum. During an ICO, new Ethereum-based (called ERC20) tokens are created. Depending on how widely used the tokens end up being, they can create demand for Ether by way of transaction fees (gas). As the number of tokens and their usage climbs, so does the demand for Ether.
Effects of regulation
When it comes to ICOs, we must accept the good with the bad. A bad ICO will accept Ether, dump it on the market, and fail to deliver a product. This is an inevitable result of a relatively unregulated new market. As more regulations are put in place and ICOs are more carefully monitored by authorities, we can expect less of this behavior, and more legitimate projects.
It should be noted that not every issue with ICOs can be solved through regulation. Even when an company responsibly cashes out Ether to fund their project, the short term effect of this will bring the value of Ether down. Some companies have decided to lock up a percentage of ICO funds for a certain amount of time, but this doesn’t actually solve the problem of Ether selloffs, since Ether still must eventually be sold for funding.
Despite the short term detrimental effect that ICOs can have on the value of Ether, the long term value that successful projects can bring to the Ethereum Blockchain could be invaluable. Ideally, this funding will provide a long term future for Ethereum, as it’s integrated with products throughout many different industries down the line.
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Author: Blaise Mathai