Take any five 'initial coin offerings' (ICOs) and statistically four will be scams according to the Satis Group – an ICO advisory company. ICOs utilize the public craze of cryptocurrency and "blockchain technology" – the hype of the market as a whole – as a method for companies to raise capital. But this capital can be backing essentially nothing if the coin is pointless and/or centralized. And it can still have an outrageous value due to the market's ‘fear of missing out’ (FOMO) mania.
The study by the Satis Group reports that only 8% of ICOs make it to a reputable exchange. This figure is astounding, yet not surprising. Exchanges have to maintain their reputations in a market where trust is required in everything outside of the cryptography. Yet the money is flowing.
An interesting figure comes in the form of the ‘failed’ coins, which only amount to approximately 6%. Due to the open source nature of blockchain technology, it’s actually relatively easy to create these ICOs and tokens. They can be copies of any open source coin which came before. Therefore, this figure is perhaps due to the relative difficulty to ‘fail’ where the code has already been proven functional.
Failure then leans on the marketing teams, the scammers calling themselves the ‘marketing team,’ or too much tinkering with the proven open source code used as the foundation. It's this relative ease which has allowed ‘joke’ coins like the Reddit creation ‘Garlicoin’ to snowball and gain momentum, and can lead to such coins sustaining some form of value. Garlicoin is currently valued at ~$0.04 USD a coin, after previously reaching over $1.00 USD in early February 2018.
Satis Group advises that their definition of a scam is ‘a project that expressed availability of ICO investment... did not have/had no intention of fulfilling project development duties with the funds, and/or was deemed by the community… to be a scam.’ Their research is not an exact science, but given the ease at which users will jump on an ICO, garner press and inflate the value, before dumping the coins to anyone willing to purchase, the statistics they provide are not hard to believe.
Even established companies are jumping on the bandwagon – Kodak attempted to raise funding by creating and selling a faux coin back in January 2018. This by no means is a small company's method of obtaining funds to start-up.
The large accountancy and auditing firms are also investigating ICOs, and the sheer volume and value seemingly created out of thin air has raised the ears on SEC watchdogs. ‘Big Four’ global powerhouse, Ernest & Young, published a report following its own investigation, advising that it found one in ten coins from an ICO had been lost to ‘hackers.’ It classified ‘lost to hackers’ in this context as the coins being lost due to a clear attack.
It’s little wonder that the large firms operating in the world of fiat are investigating ICOs – Ernest & Young note that investment in ICOs, as of the peak in December 2018, had almost hit the $4B USD mark: nearly double of that raised by traditional venture capital investments for blockchain projects. However, ICO investments look to have since hit fever pitch, and the market is responding: the level of investment by this method is slowing down with fewer and fewer ICOs hitting their targets.
ICOs look to have had their fun. With each report and added transparency to the ICO space, it appears as though even fewer ICOs are going to hit their investment targets prior to coin/token launch. It’s a good thing given that over four out of every five are loosely thrown together, without guarantee of product or tangibility of direction. Company shares undoubtedly have more intrinsic value as they are tied to a chunk of the company. The company has a legal obligation to every shareholder. ICOs, on the other hand, promise the world but can deliver smoke without repercussions. There is no legal precedent and no tangible backing.
It’s possible the recent bear market is in large part a result of broken ICOs. Perhaps on the next wave up investors will be armed with research from brick and mortar firms, like Ernest & Young, which will sit in the back of their minds reminding them of the absolute importance of research. With so many ICO scams, built on rumor and the ‘fear of missing out,’ the overall affect on the cryptocurrency community may be negative.
However, with ICO insanity diminishing, the market appears to be picking up and showing signs of a potential reversal. Hopefully lessons learnt in the recent downturn will serve to make investors wiser for the next bull run.