Editorial 29 October 2018Erik Gibbs
Be careful when considering an ICO investment
Initial coin offerings (ICO) are the fashionable way to raise funds for any cryptocurrency project. The first-ever instance of the fundraising activity was seen when Mastercoin (now Omni Layer) held its ICO in 2013 and it was unarguably considered a success. However, looking at the digital currency’s status now, that ICO definitely should not be seen as such. In fact, according to a recent study, the majority of the ICOs could potentially be considered a failure.
A report published by major auditing firm Ernst and Young a little more than a week ago shows that ICOs, overall, are not the money-makers most people think. The company compared current data from 141 ICOs with the data available for the same companies in December 2017. Those 141 companies comprised 87% of all ICO funding that was attracted last year.
The auditor’s “The Class of 2017” report showed that 86% of the companies behind the ICOs are now trading lower than their prices when the offerings were listed. 30% of the projects, which correlates to 87% of the entire funding, have lost “substantially all value,” resulting in the projects being considered worthless.
Ernst and Young also indicates, “An investor purchasing a portfolio of The Class of 2017 ICOs on 1 January 2018 would most likely have lost 66% of their investment.” Additionally, a large number of the projects have now abandoned their token models completely, which could lead to the coins become totally obsolete.
The firm explains, “Abandoning their ICO investors by de-emphasizing the role of their tokens [….] projects accepting fiat usually offer some benefits for token users, similar to points in traditional loyalty programs. However, users do not use utility tokens to store value. To use the platform, users have to purchase the necessary amount and incur related transaction costs and token volatility risk.”
Despite the decline in value, and the increase in risk, many organizations still turn to ICOs in order to attract funding. Some do it to capitalize on the hype; others do it because it’s any easy to receive money without a lot of risks.
The offerings aren’t limited to only blockchain-specific organizations, either. Even some gambling companies have announced that they plan on launching an ICO in order to introduce casinos that operate through cryptocurrency. Based on the overwhelming degradation of the ICO market, an investor would be wise to think twice before turning over his or money to an ICO when there are better chances that investing in one of the top coins directly will offer better returns.
Note: Tokens on the Bitcoin Core (SegWit) chain are referenced as BTC coins; tokens on the Bitcoin Cash ABC chain are referenced as BCH, BCH-ABC or BAB coins.
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