The 2018 crypto ecosystem is looking significantly different than 2017. Although the values of the most prominent cryptocurrencies are down considerably from their December 2017 highs, new digital currencies issued through ICOs are receiving record investment.
Buoyed by the blockchain’s growing reputation and investors’ desire to score big by getting in on the ground floor of the next Bitcoin, the initial coin offering (ICO) industry is on a six-month boom where more than 600 ICOs raised nearly $13 billion toward their projects.
ICOs are a unique combination of a stock purchase and a crowdfunding campaign, and they afford investors an opportunity to support platforms they believe in. However, unlike the similarly named initial public offering (IPO), ICOs are unregulated, and investors don’t acquire a share of the company in return. Instead, they receive a new token that powers and support the company’s blockchain platform.
This wild-west environment has spawned some of the most compelling platforms in crypto – Ethereum launched via an ICO in 2015 – but it’s also been subject to abuse. In May 2018, a bombshell investigation by The Wall Street Journal found that nearly 20% of ICOs used included red flags for fraud and abuse.
Now, a report prepared for Bloomberg by SATIS Group, an ICO advisory firm, argues that the vast majority of ICOs are scams.
ICO Fraud is Frighteningly Prevalent
The company’s July report determined that nearly 80% of ICOs can be classified as scams. To facilitate their analysis, ICOs were organized into six categories:
- Identified Scam
- Gone Dead
As the report notes,
“On the basis of the above classification, as a percentage of the total number of ICOs, we found that approximately 78% of ICOs were Identified Scams, ~4% Failed, ~3% had Gone Dead, and ~15% went on to trade on an exchange.”
At a glance, this data seems to significantly compromise the long-term viability of the ICO mechanism. However, it turns out that investors are impressively savvy at determining appropriate investments.
Fraudulent ICOs Receive Little Funding
When measured by dollars raised, ICO fraud is much less prevalent. For instance, SATIS Group estimates that less than 1/10th of ICO funding went to scam projects. Moreover, the vast majority of the $1.3 billion allocated to these companies derived from just three fraudulent ICOs. Pincoin, Arisebank, and Savedroid combined collect most of the fraudulent funds.
Incredibly, the report concludes,
“Outside these three projects, identified Scams got away with just $30M in fundraising (or ~0.3% of all time ICO fundraising).”
SATIS Group believes that the crypto community is uniquely adept at identifying and exposing fraudulent projects. In contrast, Workable projects tend to attract vibrant online communities that adapt their messaging and support their development. As a result, SATIS contends, 54% of ICO funding goes to projects categorized as successful.
Unfortunately, this assessment, although positive for ICO enthusiasts, only adds to the complexity of this still-novel capital raising method. In early July, Bloomberg reported on a Boston College study which discovered that more than half of ICOs that raise money don’t last more than four months after the token sale.
It is difficult to draw firm conclusions from this data. ICOs remain a uniquely risky investment but with the potential for a big payoff if they are successful in the long-term. Whether a project collapses because it was fraudulent from the start or because it wasn’t viable in the long-term have a similar effect on investors – they still lose their money.
However, from an integrity standpoint, the SATIS Group report indicates that the crypto community is uniquely competent as self-policing, and fraudulent projects, though prevalent, are extremely unpopular.