Why ICOs Often Fail
Weʼve all heard the statistics by now – each one more dramatic than the last.
1 in 4 ICOs will fail.
99% of ICOs fail in their first year
More than half of ICOs fail within first 4 months
As an investor, observer, or someone simply interested in the topic, the first thing to consider regarding ICOs is how new they are. The ICOs phenomenon has only cropped up in earnest since 2017 – and for those keeping track, itʼs currently only 2018.
So, while itʼs too soon put hard numbers on the failure rate of ICOs since we simply havenʼt given the market enough time to perform, sort itself out, and pick clear winners in the space, it is possible to generally observe that many ICOs will fail.
To dive into this topic, weʼll take a look first at what ICOs are followed by 4 reasons they sometimes fail.
What Is an ICO?
ICO stands for initial coin offering and is the cryptocurrency market equivalent of an IPO. The first major difference between IPOs and ICOs is that instead of there being a host of intermediaries between the asset and shareholders, ICOs are sold directly to holders via blockchain platforms like Ethereum, Stellar, and Neo.
Another notable difference that weʼll return to later is the fact that unlike traditional fundraise models, ICOs sourcing funds directly from private investors often do so with little more than a whitepaper. Whitepapers are documents which detail what the ICO project is, how it works, and what it aims to solve.
Perhaps the most important difference of all is that whereas IPO buyers receive company shares in return for their investment, ICO buyers receive utility tokens. Utility tokens donʼt represent ownership of the network or application they are issued from, but instead represent a piece of network/application utility. Utility tokens are slowly being replaced by security tokens which do resemble company shares, but thatʼs another topic for another time.
4 Reasons Why ICOs Fail
What constitutes a failed ICO? First, when ICOs are delisted from enough exchanges that they no longer have liquidity – thatʼs a failed ICO. Second, if an ICO gets found out as a scam – thatʼs definitely a failed ICO (see: Bitconnnnnneeeeeeeeeeeect). Third, when an ICO blows through their funds without achieving their milestones, thatʼs a fail.
1. Inexperience. ICO teams are often made up of recent university grads or developers with little to no experience. Suddenly put $25 million in their hands with little to no oversight, and you have a recipe for disaster.
2. Bear markets. Cryptocurrency markets are notoriously volatile. Itʼs great when that volatility is within a bullish trend, but as weʼve witnessed in 2018, bear markets happen. Moreover, when they do happen, ICO projects take the worst losses.
3. Incapability. Whitepapers often over-promise on technology only to have the team quickly realize that theyʼre in way over their heads. Cross-chain-capable mainnets by Q2 sound great until…the team realizes they donʼt even have a proof of concept yet.
4. Liquidity. Many projects fail to understand the importance of creating liquid markets for their tokens. The long-game of a projectʼs funding often comes from their own shares in the projects tokens – but if those tokens are stuck on lowly exchanges with $10 in daily volume, theyʼre as good as worthless.
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