Cryptocurrency project Tezos raised over $200 million in July by selling digital tokens so it could build out a secure network for smart contracts. A month earlier, Bancor reeled in $154 million on the promise of creating a transparent way to value digital coins.
They're two of the biggest so-called initial coin offerings (ICOs) to date, and both hit huge stumbling blocks right out of the gate. Tezos was struck by internal financial shenanigans and an embarrassing public spat. Bancor was beset by trading glitches — its coin is worth less today than it was at the time of launch.
And just like that, one of the hottest summer trends in tech has faded before year-end.
While investors pile into bitcoin, which surged past $10,000 for the first time this week, and continue to bet on the newer currency ethereum, they've lost their appetite for niche tokens that hit the market through a rush of ICOs.
According to TokenData, an industry analytics firm, November will wind up as the slowest month for ICOs since August, with 34 offerings as of Wednesday. More importantly, just 23 percent of the deals reached their maximum goal, the fifth straight month in which fewer than one-third of ICOs hit their target.
That's a stark contrast to the April-to-June period, when between 41 and 57 percent of deals met their mark. October was the biggest month for ICOs at 90, but also the month with the weakest success rate at 17 percent, according to TokenData.
"The downward trend in number of projects that reach the hard cap is a signal that the ICO hype has cooled off a bit," said Ricky Tan, founder of TokenData, in an email. He said many of the token sales falling short of their goals are "mediocre to low-quality projects."
High-profile eruptions aren't the only problem. Regulators are also making their presence felt. The Securities and Exchange Commission issued its first public warning in July, indicating that digital coins may be subject to securities laws, and the agency followed up in September by charging two companies with ICO fraud. That month, China banned initial coin offerings.
Celebrities have been put on notice after stars including boxer Floyd Mayweather, actor Jamie Foxx and Paris Hilton endorsed specific ICOs. The SEC said on Nov. 1, without naming names, that "these endorsements may be unlawful if they do not disclose the nature, source, and amount of any compensation paid, directly or indirectly, by the company in exchange for the endorsement."
William Mougayar, organizer of the Token Summit conferences in New York and San Francisco, said the regulatory hurdles have slowed the market.
"What's changed recently is they are spending more time on the legal aspect, so they are not developing these ICOs as quickly as they were before," said Mougayar.
ICOs, almost unheard of until 2017, have raised more than $3.6 billion this year, according to financial research firm Autonomous Next. The fundraisers are for projects based on blockchain technology and for teams focused on gaming, cloud storage and smart contracts. To contribute, backers buy a project's token with the hope that it will give them access to a technology platform, or appreciate in value like an investment.
Crypto entrepreneurs have turned to ICOs as an alternative to venture capital, both as an easier and faster way to raise hefty amounts of money and because founders don't have to give up equity.
Emmie Chang, the founder of crypto investment platform Superbloom, said at the ICO Forward NYC Summit earlier this month that ICOs have changed the whole fundraising process. Rather than pitching individual investment groups, crypto teams try to drum up enthusiasm through places like messaging app Telegram.
"You have to now put out your message to the world," Chang said, adding that projects need to reach about 100,000 people in order to get the necessary 5,000 or 10,000 token buyers.
Earlier this year, the most high-profile ICOs were hastily reaching their target. Storj and Civic raised tens of millions of dollars in no time. EOS said on July 1 that it raised $185 million in five days.
Tezos and Bancor similarly reached their fundraising goals with speed. But then the problems began.
Arthur and Kathleen Breitman, the founders of Tezos, wrote in an open letter on Oct. 18 that the project had fallen behind in building up its development team and in "articulating our vision." More ominously, the Breitmans said they discovered that Johann Gevers, head of the Tezos Foundation, had been hiding how much he was attempting to pay himself.
While Tezos tries to settle the financial dispute and at the same time set up a working organizational structure, the law firm Levi & Korsinsky is investigating the ICO for "possible violations of federal securities laws," according to a statement released last week.
Bancor's token price, meanwhile, dropped precipitously after its ICO in June. Even after bouncing back some this month, it's still down by more than 40 percent from the offer date. One critic of the ICO said that Bancor, in its effort to create a price discovery mechanism for digital coins, produced a currency that's "for show."
Blockchain technology is still in its early days. Crypto bulls are betting that it will infiltrate every major industry, just as the internet did two decades ago. Tezos and Bancor aren't giving up.
But just as scores of online companies went bust in the process of building the web, plenty of crypto projects will blow through investor cash without ever creating a business or even a product.
"ICOs were a clear bubble," said Ari Paul, the co-founder of cryptocurrency investment firm BlockTower Capital. "It was partially popped by the expectation of regulatory scrutiny, governance concerns raised by Tezos and diminishing 'greater fools' to pay full price."
Still, Paul is optimistic that plenty of investment opportunities will emerge.
"The flood of capital includes diamonds amongst the coal," he said, "with some great projects."