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A Guide to Initial Coin Offerings (ICOs)

Only 40 Percent of ICOs reached target in November 2017 compared to 90 Percent in June 2017

Reading Time: 2 minutes by on January 29, 2018 Commentary, Finance, News

Research by Ernst & Young has shed light on a worrying aspect of investing in cryptocurrency projects online. The multinational professional services company analyzed more than 372 “initial coin offerings” (ICOs) and found that about ten percent of the funds raised through ICOs are either stolen or lost in cyber attacks.

Professional Study Reveals Surprising Results

For the uninitiated, an ICO is an unregulated means of raising funds for a venture. In a typical ICO campaign, a predetermined percentage of the new cryptocurrency is distributed among early backers in exchange for fiat or other (more established) cryptocurrencies such as bitcoin and ethereum.

The study found that nearly $400 million of the total $3.7 billion funds raised by ICOs till date fell to cyber thugs. The report claims that phishing is the most commonly used hacking technique to target ICOs, with perpetrators using it to get away with as much as $1.5 million on average in ICO proceeds every month.

Not only that, but the study also found the volume of ICOs to be on a steady decline since late 2017. Apparently, only one in four ICOs reached their target in November 2017, compared to 90 percent in June 2017.

The study was conducted amidst the growing cryptocurrency investment craze caused by an unprecedented surge in bitcoin price. It observes the fact that many young companies were able to raise millions of dollars online to fund their projects with just a few employees and a business plan surmised in a so-called white paper.

The declining success rate of recent ICOs, according to Ernst & Young, can be attributed to the deteriorating quality of projects. Part of the blame also goes to certain issues that emerged around many earlier projects, alerting investors about possible faults in the new ICOs.

“The volume just exploded, people raised their fundraising goals, and the quality just dropped,” Paul Brody, global innovation leader for blockchain technology at Ernst & Young, said while explaining the lower success rate of new ICOs.

“We were shocked by the quality of some of the white papers, we see clear coding errors, and we see conflicts of interest between the companies issuing tokens and the community of token holders.”

The study also pointed out that valuations of most ICO tokens are usually driven by FOMO (fear of missing out) which has little or no connection to essential market fundamentals like project development. Furthermore, it stretched the point that the software code powering specific cryptocurrencies contain “hidden” investment terms that either elude or clash with earlier disclosures.

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