New Audit Report: ICO Market “Worse Than We Thought”
Cryptocurrency, Initial Coin Offerings (ICOs)–Initial coin offerings, the popular method for raising capital in the space of blockchain and token-based cryptocurrency projects, has again found its way in the headlines over the controversial and lawless nature of its marketplace.
Ernst and Young, a Big Four Auditor, published a new report on Oct. 19th claiming that–among other things–the state of the ICO industry is worse than they originally imagined when examining ICOs that have been on the market for over year.
Labeled “The Class of 2017,” the new report examines ICO projects that were originally scrutinized by the firm in December 2017, with the sample group made up of 141 of the top ICOs which constituted 87 percent of all initial coin funding generated last year.
The results, published less than one year on, are not heartening for those hoping to find the ICO market thriving amidst the otherwise slumping crypto marketplace. Of the projects examined in last year’s analysis, 86 percent are trading below their listing price, making the value of the project negative to what it was initially able to generate. As opposed to gaining in value over the course of this past year, whether through adoption or further development, the vast majority of top ICOs have fallen to below their listing price, giving the indication that the ICO market has suffered heavily relative to the falling price of BTC or the projects were initially overvalued in the frenzy of crypto and blockchain investing that took place in the latter half of 2017.
In addition, 30 percent of examined ICO projects–which again constituted 87 percent of the total funding for all projects in 2017–were labeled by Ernst and Young as having lost “substantially all value,” making the projects virtually worthless as their current trading price. Despite having a sample comprising the top and most promising ICO projects to appear in 2017, EY concludes from their study that,
“An investor purchasing a portfolio of The Class of 2017 ICOs on 1 January 2018 would most likely have lost 66% of their investment.”
While the plummeting value of top ICO tokens from 2017 is somewhat unsurprising, given the severe shedding in market cap the entire industry of crypto has undergone throughout 2018, EY found a troubling trend in the lack of development to come out of these projects. When analyzing projects for their development of a working product or prototype, the auditor found that only 29 percent would fall into that category, despite being at least a year out from their creation. In addition, 71 percent of the projects in the study were found to have “no offering in the market at all,” constituting an investment that has been built on hype alone.
Most troubling of all is the trend EY reports in established projects with a working product or prototype abandoning the token model all together–a move that assuredly hurts their investors with potential ramifications for the entire industry of cryptocurrency. According to EY, these companies are focusing on the technology and platforms created through the ICO, while slowly phasing out the need for the token, effectively,
“Abandoning their ICO investors by de-emphasizing the role of their tokens [….] projects accepting fiat usually offer some benefits for token users, similar to points in traditional loyalty programs. However, users do not use utility tokens to store value. To use the platform, users have to purchase the necessary amount and incur related transaction costs and token volatility risk.”