Analytics

Analysis of ICO Market Losses

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Initial Coin Offering (ICO) is used to attract cryptocurrency funds. ICO is one of the forms of crowdfunding outside the traditional financial system.

The popularity of ICO is gaining momentum since 2014, and in 2017 reached its peak. According to Soinschedule.com, for the last 4 years the following dynamics of the ICO market had been observed:

  • 2014 – $ 0.026 billion;
  • 2015 – $ 0.014 billion;
  • 2016 – $ 0.222 billion;
  • 2017 – $ 3 billion

From July 2014 to May 2017, 117 projects participated in the ICO, 56 of which were successful and attracted $378 million of investments in total. 34 tokens from 56 successful crowdsales have been included in Coinmarketcap listing and today are freely traded in the cryptocurrency market. Their market capitalization accounts for $1.16 billion. In total, these 34 projects raised about $150 million within the ICO, and their dollar value increased eight-fold.

The year 2017 was a turning point in the history of the ICO – in the first three quarters of the year, the number of ICO campaigns increased to 300. In the first half of the year, ICO allowed projects to raise capital in the amount of more than $797 million. In total for 3 quarters of 2017, 201 projects raised about $3 billion investment through the ICO. To date, the crowdsales continue to be quite active, and this amount is increasing every day.

Thus, we can say that in 2017, there was a new project that sought to attract funding via the ICO almost everyday. However, along with the growing popularity of ICO, the number of projects that do not reach their goals has also increased. In July 2017, their share was 7% of the total number, in August – 54%, and in September – already 66%.

Most of the projects that stand behind the tokens are at various stages of development – from the level of idea to the beta version. In addition, many of these projects are aimed only at exploiting the growth of the cryptocurrencies and the interest of inexperienced investors. Not all projects that have launched the ICO are able to achieve their goals and bring real benefits to investors. Failure can overtake the project for several possible reasons:

  • weak team – the project team may be inexperienced or incapable of bringing the project to implementation;
  • Poor development of the project business model, as a result of which the project may face insurmountable difficulties;
  • insufficient analysis of the market – the product of the project implementation may not have the required level of demand for getting profit in the market;
  • incompetent advisors or lack thereof;
  • fraud

According to Chainalysis, for the year 2017, fraudsters appropriated about 14% of the funds raised by projects using the Ethereum-based ICO, namely about $ 225 million out of $ 1.6 billion. As a result of fraudulent activity, about 30,000 investors suffered losses with an average of $7,500. Cybercrime in relation to investors’ financial resources is growing faster than the amount of investments attracted within ICO. The jump in both these indicators has become especially noticeable since March 2017.

ICO project can be considered successful if the issuer managed to distribute more than 75% of the tokens from the goal set by it. Most of the issuers of tokens indicate their goals, setting a fixed level with a small tolerance. All that remains to be done for the success of the project is to compare the stated objectives of the project with its actual results. The project, which collected less than 75% of the planned target, is considered unsuccessful.

According to data for June 2017, only 1 project did not reach its goal set in the framework of the ICO. However, the picture changed radically in the following months – from July 1st to September 25th, 51 ICO were launched, which were expected to fail. This means that during this period the percentage of ICO failure has risen to 59%.

Despite the fact that even an unsuccessful ICO allows the project to attract a certain amount of money for the development and implementation of the idea, in most cases the value of the tokens of such projects remains compromised forever. Additionally, in the event of unsuccessful ICO, the level of collected capital is rapidly declining – the average ICO return of $4 million in July 2017 which fell to $ 2 million in September 2017. At that, 43% of the total ICO in this period (21 projects) could not collect even $ 1 million.

A potential investor who may be interested in the prospect of participating in an ICO project is usually a young and dynamic person who is striving for financial independence. Each investor is an individual with his own views on the ICO and expectations from the project. However, there are some general criteria for investor behavior that allow them to be grouped together.

For example, a Western investor, on average, is ready to invest in the ICO project from $ 1,500 to $5,000. His age is about 29 years, the annual income is $75,000. He takes part in ICO with the aim of preserving and multiplying personal funds, allocating investments for different projects and identifying the most successful one, the price of the token of which will increase like bitcoin price. He is willing to invest in the ICO, evaluating the project’s prospects, his benefits, the project team, the white paper and expert opinions. At the same time, there is a tendency of rather aggressive investment among US citizens, European investors are more careful and discerning in their decisions, residents of Asian countries carefully study information about projects and take a long time to invest.

The average age of the Russian-speaking investor in ICO is 25-34 years. 36% of investors in this segment are IT specialists, 12% are marketers, and 10% are private entrepreneurs. Most Russian-speaking investors are ready to invest in ICO from $100 to $ 499 (32%), 8% are ready to invest up to $49, and only 2% can invest over $10,000.

Despite all the cultural differences, absolutely all investors pay close attention to the choice of the project for investment and have common fears – they are afraid to invest their money in a scam or not to make money on the project, and worried about the possibility of a protracted project implementation deadlines. In order to avoid all possible pitfalls before investing in the project’s tokens, investors study the project team and its activity in social networks, conduct media channel analysis, and research on their own. Unfortunately, none of these research methods is able to guarantee the investor success of the project chosen by him and the possibility of getting profit from it.

The lack of a regulatory system in the ICO structure and the mechanisms that can calculate the real profitability of a project contribute to a rapid increase in the indicator of losses among investments. In this regard, the development and launch of application tools that will reduce the threshold of entry to the market, simplify participation in ICO and its implementation, protect against fraud and guarantee safe investment is becoming more relevant.

According to VC Mangrove Capital, conducted on the basis of 204 ICO projects, the average yield of ICO is 1320%. The possibility of self-regulation in the ICO structure due to the existence of a mechanism for controlling the investment flow will increase this indicator by at least 1.5 times.

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