Last year, Bitcoin surged over 2,000% to go from a 3-digit price tag to a 5-digit price tag in 11 months. Following the rise of Bitcoin, the cryptocurrency market experienced a massive market run-up as the total market capitalization of all cryptocurrencies went from $18 billion to over $800 billion when it was at its peak at the beginning of this year, according to data form CoinMarketCap.
The crypto market boom also led to the emergence of numerous new digital currencies through a process called the Initial Coin Offering, or ICO for short. Based on Investopedia, an ICO is used by startups and other established companies to “bypass the rigorous and regulated capital-raising process required by venture capitalists or banks”.
In an ICO, the company will distribute cryptocoins to enthusiasts and supporters of the firm’s initiative, who will purchase them with fiat or other digital currencies. These cryptocoins are analogous to shares of a company sold to investors in an Initial Public Offering (IPO).
Concerns Surrounding ICOs
The increasing abundance and popularity of ICOs as a crowdfunding method by startups have raised concerns from both regulators and investors worldwide. There have been cases of scams and fraud where entire ICOs vanished along with the money they collected from their investors.
Take Prodeum for example, a cryptocurrency startup that promised to create a database of fruits and vegetables on the Ethereum blockchain. The company’s professional-looking website appeared online Thursday, but by Monday, it disappeared, leaving investors with a single word:
Source: Prodeum.io
There was also the case of Confido, which disappeared with $370,000 worth of investor money. And let’s not forget about BitConnect, which received a cease-and-desist letter from U.S. State Regulators after allegations of it being a Ponzi scheme spread across the world of crypto.
Earlier this month, in a joint hearing between the SEC and the CFTC in Capitol Hill, a consensus was reached – while scams and fraudulent ICOs must be cracked down, the general cryptocurrency market must be allowed to develop. According to Christopher Giancarlo, the chairman of the CFTC, “we must crack down hard on those who abuse our young enthusiasm for Bitcoin and blockchain technology for their own personal gains.”
A survey by Bitcoin.com shows that out of the 906 ICOs that are tracked by TokenData, 142 failed before raising funding, and another 276 failed after fundraising. Moreover, there are also 113 projects that “semi-failed”, where either the teams behind the projects vanished or the community backing the ICO dwindled over time. That accounts for a failure rate of close to 59%. According to statistics by Bitcoin.com, the total funding of failed projects from 2017 was over $233 million.
The ICO scene is far from perfect. If we dive into the Wild, Wild West of ICOs, we will very quickly realize that it is not always all sunshine and rainbows. Like how Bitcoin.com puts it, in this boulevard of broken promises, all we find is a “digital graveyard” of “abandoned Twitter accounts, empty Telegram groups, websites no longer hosted, and communities no longer tended.”
ICOs might bring you astronomical returns when it comes to investing in cryptocurrencies, but be sure to do your homework before putting any money in to avoid falling victim to fraud and empty promises.