Initial coin offerings, also known in the cryptocurrency market as ICOs, have become the hottest new method of crowdfunding and led to a massive boom of new startups able to raise funds from eager investors seeking to strike it rich on a fledgling cryptocurrency.
However, it’s not all positive. The United States Securities and Exchange Commission consider all ICOs and cryptocurrencies born from an ICO to be unregistered securities, putting the companies behind the ICOs - as well as investors - at risk. The SEC has spent countless hours warning inverters of the potential pitfalls of investing in an ICO, even creating a fake ICO website to show a live example of what “red flags” investors should look out for.
Experts from around the industry agree, even CBOE President Chris Concannon recently commented on ICOs, saying a day of “reckoning” is coming.
According to research from Boston College, it’s easy to see why the SEC and many industry experts believe that ICOs are a major risk for investors and that they should steer clear: A staggering 56% of all ICOs fail within the first four months after the token sale is finalized.
That means that more than half of all ICOs, result in a bust for investors. With over $5 billion dollars raised by ICO crowdfunding so far this year alone, investors are likely losing a lot of money on these risky investments.
Boston College researchers Hugo Benedetti and Leonard Kostovetsky came to the figure after they examined 2,390 ICOs that were completed before May 2018. Kostovetsky says the biggest return comes during the first month after the token sale, but added “once you go beyond three months, at most six months, they don’t outperform other cryptocurrencies.”
Kostovetsky concludes that "these are stakes in platforms that have not yet been built, that have no participants yet. There’s a lot of risk. The majority of ICOs do fail.”