Author: Jagdish Kumar, India
With ICO a new word for raising funds for new startups, but here is a caution of all who are looking to invest in ICOs, as 40% fails within four months after their launch, says a study.
The study conducted by Hugo Benedetti & Leonard Kostovetsky researcher from Boston College, Massachusetts found, “Over 4,003 Initial Coin Offering (ICOs) projects has concluded that ‘more than half of the projects fail’ within four months of their token sales despite raising a combined total of around $12 billion till date.”
The study titled ‘Digital Tulips? Returns to Investors in Initial Coin Offerings’ found that nearly of the 4003 ICOs that has started, only 44.2% were still operational, while the balance have either failed or are out of the exchanges.
Intensity of tweets from the cryptocurrency official Twitter account after the ICO were used to estimate that the survival rate for startups after 120 days (from the end of the ICOs) is only 44.2%, assuming that all firms inactive on Twitter in the fifth month did not survive, the paper found.
The study also revealed that 83% of the 694 ICOs that don’t report capital and don’t list on an exchange are inactive after 120 days.
For the 420 ICOs that raise some capital but don’t list, this figure falls to 52%, and for the 440 ICOs that list on an exchange, only 16% are inactive in the fifth month.
“We find evidence of significant ICO under pricing, with average returns of 179% from the ICO price to the first day’s opening market price, over a holding period that averages just 16 days. Even after imputing returns of -100% to ICOs that don’t list their tokens within 60 days and adjusting for the returns of the asset class, the representative ICO investor earns 82%.
In 2015, there were 9 such offerings, 74 in 2016, and more than 1000 ICOs in 2017.
Furthermore, the average capital raised by successful ICOs has gone up over time from $7.9 million (before July 2017) to $11 million (in the second half of 2017) to $14 million (in 2018), the study found.
Highlighting the concerns in the crypto and Blockchain industry, the study said that because cryptocurrency accounts are anonymous, transactions are irrevocable, and ICOs are unregulated, there is a high incidence of scams and theft.
“Recently, a Vietnamese pyramid scheme used an ICO to raise $650 million and then disappeared with the money. The co-founders of Centra, which had raised $32 million in an ICO, were arrested in April 2018 in Florida for fabricating information about deals that their company was making and listing fictitious people on their website”, the study underlined.
The study concluded adding, the ICOs have the potential to change how startup companies raise money, providing more control to entrepreneurs, greater liquidity to investors, and additional investment opportunities to early adopters.
However, tokens are sold in ICOs at a significant discount to their market price (and at a much greater discount than IPOs), generating at least an 82% average abnormal return for the representative (i.e. weighted by capital invested) ICO investor.
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