Less Than 4% of All Initial Coin Offerings Are a Success

Last year, the digital currency market was unstoppable. Having begun the year with a market cap of $17.7 billion, the aggregate value of virtual currencies soared by more than 3,300% to finish 2017 at $613 billion. It was very likely the single greatest year we’ve ever witnessed for an asset class.

Why cryptocurrencies soared in 2017

There’s certainly been no shortage of catalysts that’ve pushed the market caps of cryptocurrencies higher.

For instance, the emergence of blockchain technology is a big reason some investors are so bullish on the virtual currency movement. Blockchain offers a new means to move money without traditional banking networks, and it gives businesses an opportunity to transparently and immutably log data. In layman’s terms, blockchain could dramatically improve the speed with which cash moves from one party to another, as well as allow businesses to track supply chain products in real time, to name one prime non-currency function of blockchain.

Image source: Getty Images.

Cryptocurrencies haven’t struggled to find brand-name partners, either. The financial industry-focused blockchain developer Ripple has a real-world, cross-border payment test under way with American Express and Banco Santander, a partnership to improve on-demand liquidity with MoneyGram International, and an ever-growing list of global banks that are now part of its RippleNet service. The more brand-name companies that give credence to what cryptocurrency developers bring to the table, the higher virtual token valuations could go.

Initial coin offerings are a breeding ground for fraud

But for all the hype that’s surrounded cryptocurrencies, one superseding concern that continues to linger is their lack of regulation. To some folks, this lack of regulation is precisely what makes virtual currencies so great. But to others, it’s the reason digital currencies are worth avoiding. Perhaps no aspect of cryptocurrencies highlights this danger more so than initial coin offerings, or ICOs.

Think of an initial coin offerings as you would an initial public offering for a stock. It’s a means for the company (or in this case, the developers) to raise capital. For the engineers behind a virtual coin, this capital is a means by which to fully complete their vision and launch their coin and/or underlying blockchain. But whereas an initial public offering has a set of regulations and channels that must be followed, ICOs are akin to the Wild West of capitalism. It’s a virtually no-holds-barred arena where scams can, and do, rear their ugly heads.

In March, ICO advisory firm Satis Group released a research paper that detailed its extensive findings on cryptocurrency ICOs. After removing ICOs that had a market cap of less than $50 million from the equation, the authors of the study came to one simple conclusion: Most ICOs are scams.

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Only a small fraction of ICOs prove successful

The study broke ICOs with a market cap of greater than $50 million into six categories. The following categories are taken verbatim from the Satis Group’s report:

  • Scam (pre-trading): Any project that expressed availability of ICO investment (through a website publishing, ANN thread, or social media posting with a contribution address), did not have/had no intention of fulfilling project development duties with the funds, and/or was deemed by the community (message boards, website or other online information) to be a scam.
  • Failed (pre-trading): Succeeded to raise funding but did not complete the entire process and was abandoned, and/or refunded investors as a result of insufficient funding (missed soft cap).
  • Gone dead (pre-trading): Succeeded to raise funding and completed the process; however, was not listed on exchanges for trading and has not had a code contribution in Github on a rolling three-month basis from that point in time.
  • Dwindling (trading): Succeeded to raise funding and completed the process, and was listed on an exchange; however, had one or less of the following success criteria: deployment (in test/beta, at minimum) of a chain/distributed ledger (in the case of a base-layer protocol) or product/platform (in the case of an app/utility token), had a transparent project roadmap posted on their website, and had Github code contribution activity in a surrounding three-month period (“Success Criteria”).
  • Promising (trading): Two of the above Success Criteria.
  • Successful (trading): All of the above Success Criteria.

Of the ICOs examined, 81% were identified as scams. I repeat, more than four out of five ICOs turned out to be fraudulent! Whether they were pump-and-dump schemes or run by developers that were not operating in the good faith of their investors, Satis Group finds that most ICO projects won’t end well for early investors. This is likely a major reason social media giants like Facebook, Twitter, Alphabet‘s Google, Baidu, Sina‘s Weibo, and Tencent have all banned cryptocurrency and ICO ads on their respective platforms.

Image source: Getty Images.

Of the remaining ICOs, 6% landed in the “failed” category, and another 5% had “gone dead.” This meant just 8% of all ICOs with a market cap in excess of $50 million actually made it to trading. Among this small percentage, 2.8% fell into the dwindling category, with another 1.6% showing as promising. In total, just 3.8% of ICOs in excess of $50 million were considered “successful,” according to the Satis Group.

And, keep in mind that the Satis Group has nothing to gain by trashing the ICO process. After all, as an ICO advisory firm, it could be reducing its opportunities by highlighting the reality that most ICOs wind up costing investors big time!

If this study demonstrates anything — aside from the fact that investors should be avoiding ICOs like the plague — it’s that regulation is sorely needed to protect current and future cryptocurrency investors. Yes, regulation could put an end to some of the anonymity and volatility that’ve ruled the roost with digital currencies, but it would also provide the groundwork that would allow the Securities and Exchange Commission to do its job of protecting American investors. Put frankly, until this regulation is in place, investors should avoid investing in ICOs, or virtual tokens for that matter.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Sean Williams has no position in any of the stocks or cryptocurrencies mentioned. The Motley Fool owns shares of and recommends Alphabet (A and C shares), Baidu, Facebook, Tencent Holdings, and Twitter, but has no position in any cryptocurrencies mentioned. The Motley Fool recommends Sina. The Motley Fool has a disclosure policy.

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