CoinSchedule reported that 235 ICO’s were launched in 2017. In total, they raised over US$3.7 billion. One of the biggest reasons for startups to use ICO’s is to circumvent the exhaustive and complicated process of raising funds via traditional financial institutions. They are hoping to attract investors for their projects; and investors are hoping whatever the project is, it will be successful when finalized, and the value of the tokens they buy will yield significant profit when sold or traded.
There are certainly success stories here:
- Ethereum, with its smart contracts platform, raised US$18 million quite quickly after its launch in 2015, and the price of its token has gone from US$.40 to US$14.
- Filecoin raised US$257 million in 2017. It is a clearing house for data storage solutions.
But a lot of ICO’s also fail. The and estimates range from 75% to 90%. There are no hard figures, because those that do make their funding goals go away quietly without any reporting of funding figures. In fact, according to Bitcoin Market Journal analysis, an evaluation of 600 ICO’s showed that only 394 reached their end date funding goal. And of those, only about 35% reported their funding figures. When funding is not reported, it is likely that the ICO ultimately failed.
So why do they have such a high failure rate?
There have been innumerable instances of ICO scams, and these sour investors unless they have dug deep into the research, and the startup can demonstrate a strong team, such as Ethereum did.
Another risk is scalability, if the chain technology on which they are building can’t handle it. This can result in smart contract glitches and security breaches. But beyond these obvious risks, there are other major reasons for ICO failures that do not relate to these risks.
1. Competition Within a Small Target Market
Users and investors in cryptocurrencies still represent a tiny percentage of the entire investment market. And a business plan divides the target investors even further depending upon the project, meaning that your crowdsale campaign may only appeal to a very small target audience. In the end, such projects fail to meet their target funding. Often this reason is closely related to the next one.
2. Founders Tend to Be Too Ambitious
According to OGS Capital, a team of professional ICO consultants, a lot of founders also don’t fully work through their business model, so that it appear attractive to a larger pool of crypto-investors. They fail to prop up the value of the ICO for long. So the hype wears thin, as do investors.
Then there are things that impatient founders do that can hurt its reputation during the ICO process. For example, offering discounts to investors who have the money to buy large blocks of tokens will cause smaller investors to walk away; there is also the potential for some ICO funds to be hacked. These types of things make investors suspicious and reluctant to invest.
3. Failure to Justify The Longer-Term Value
There has to be enough demand to buy a crypto, for those tokens to increase in value over time. If token inflation is unsustainable, demand obviously crashes, and the crypto becomes worthless. There will simply be not buyers and a lot of seller holding valueless tokens. Projects cannot grow unless the crypto behind them does well too.
China recently banned ICO’s, stating that they were a full threat to the nation’s economic stability. While this may only be temporary, if and when that market returns, it is likely to be heavily regulated. In the U.S., the SEC recently named DAO a security, and ICO’s could face the same applicable rules. Other countries may follow. This prospect discourages investors, in an already tiny investment group.
The other issue is in converting crypto into fiat currencies. Any investor with tokens worth more than $50,000 will face scrutiny by any bank in the U.S. and most banks elsewhere. Many, in fact, will not accept large deposits of fiat currency that have come from cryptos.
One of more of these risks has surely resulted in the large failure rate of ICO’s. Startup funds would do well to take each of them into account far before launch.
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