With the exploding interest in cryptocurrencies, investors seeking a piece of the action have participated in initial coin offerings (ICOs), in which a startup sells its own virtual tokens to raise funds.
However, of the 902 startups that launched ICOs last year, 46 percent have already failed, despite having raised over US$104 million, according to a survey conducted by cryptocurrency news site Bitcoin.com.
Data from ICO tracking site TokenData shows that 142 of the startups that launched ICOs last year failed at the funding stage while another 276 eventually faded into obscurity or simply took the money and ran.
Bitcoin.com said another 113 ICO projects could be considered as “semi-failed” since the startup either stopped communicating on social media or the community was too small that “the project has no chance of success”.
All in all, the 531 ICOs raised US$233 million from investors.
In a study released in January, Ernst & Young said more than 10 percent of funds raised through ICOs were either lost or stolen in hacker attacks.
The professional services firm reviewed 372 ICOs which raised a combined US$3.7 billion. Of that amount, US$400 million had been stolen, Reuters said.
Phishing was the most widely used hacking technique for ICOs, with hackers stealing up to US$1.5 million in ICO proceeds per month, according to the E&Y study.
However, the failure rate of ICO projects may not appear too much when compared with that of startups backed by traditional venture funding.
Shikhar Ghosh, a senior lecturer at Harvard Business School, said in a recent study that about 75 percent of startups funded by venture capitalists in the United States fail.
About 20 percent of those startups fail in their first year, while 30 to 40 percent take the investors’ capital with them.
His findings are based on data from over 2,000 companies that received venture funding from 2004 to 2010.
According to TokenData, ICOs raised more than US$5.6 billion of capital in 2017, and over US$1.3 billion in January 2018 alone.
Bitcoin.com is rather pessimistic about the short-term outlook of ICOs. It said: “Thanks to diminished returns, increased competition, and a never-ending stream of opportunistic ICOs, crypto investing in 2018 is riskier than ever.”
This article appeared in the Hong Kong Economic Journal on Feb 27
Translation by Ben Ng with additional reporting
[Chinese version 中文版]
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