They say that 90 percent of startups fail. That is an exaggerated statistic, but nonetheless creating a successful startup is hard indeed. I posit that ICOs, alternative cryptocurrencies etc. are much of the same. There are over 1000 alternative cryptocurrencies that have been created throughout the years, yet around 90% of them have effectively “failed”. Furthermore, ICOs are plagued by several risks that startups are not largely at risk for. So perhaps the 90% statistic is not so exaggerated when it comes to ICOs. Let’s explore the likelihood that any arbitrary ICO will be successful.
Right off the bat, ICOs first risk several obstacles:
- The ICO being a scam from the start
- ICO funds being hacked or stolen (such as by an employe)
- An ICO smart contract glitch
- Scalability issues on the chain they are building on top of
All four of which have already occurred on numerous occasions since ICO fever started, and those are just the ones that were obvious and/or already got caught. ICO funds getting hacked and smart contract glitches that cause destruction of funds have all already occurred multiple times in the short history of ICOs. If history is any indicator, these types of issues will continue to pop up over time.
A slow con has also been used in previous IPO/alternative cryptocurrency releases where it is not apparent for some time that there never were any plans to follow through with a road map. Unfortunately, the organizers are usually able to get off with the money and receive no penalty for doing so. So, it may not be an apparent an ICO is actually a scam for some time.
Another risk cryptocurrencies have that startups do not suffer from is that almost all of these ICOs seem to be building on top of Ethereum, which in turn results in huge scalability question marks. Since there is no clear direction as to the hows, whens and whys Ethereum will scale, this creates additional risk for ERC-20 coins and other smart contracts being written on Ethereum (most of which were funded by ICOs).
Now that we are past some of the more obvious meta issues that ICOs can encounter, let us get down to the more specific speculator reasons why most ICOs will fail. My top 5 reasons why ICOs will fail (a part from the obvious ones):
1. Too Ambitious
Perhaps one of the most common issues I see with ICOs and alternative cryptocurrencies is that a lot of them seem a bit too ambitious. Typically, in the history of alternative cryptocurrencies, most overly ambitious projects end up being perpetual vaporware. Hype and speculation can only prop up a cryptocurrency’s value for so long, and an existing product is needed sooner or later for that buy support to remain.
2. Small Target Market
Bitcoin, and especially the larger cryptocurrency ecosystem, is hardly used by a small percentage of the world’s population. Therefore, any smart contract or alternative cryptocurrency is starting off catering to a small subset of the world’s population right from the get go. Then, the ICO’s road map (or “business plan”) further defines this subset into an even smaller population. The more obscure a road map is, the more obscure its target market will be.
3. Issues With The ICO Itself
When an ICO is actively raising funds, some issues can come up during an ICO that will taint its reputation. Similar to the way “instamined” or “premined” alternative cryptocurrencies have received a lot of flak. Some warning signs that an ICO might suffer from this issue is the way tokens are distributed (a large percentage to team/legal/etc. rather than people that actually fund the ICO), an ICO occurred very quickly and not everyone was able to participate that wanted to, major discounts on tokens to venture funds and wealthy individuals before the ICO, or ICO funds being “hacked”.
4. Flawed Economics
There needs to be a sufficient amount demand to buy a token for any arbitrary ICO token’s value to be decently valuable in the long term. Properly and thoroughly planning the economics of a token’s ecosystem can be critical to a project. Unsustainable token inflation is an example of what I would consider as being flawed economics. Permanently inflationary tokens' demand must outpace the inflation being created, and thus creates a sort of ponzi scheme that is sure to eventually fail as it grows in size.
Although it is likely that not all ICOs will be considered as securities by regulatory bodies, but at the same time some of them likely will. The SEC came out with a press release stating that the DAO was a security because the “Howey Test” was applicable to it. Applying similar logic, a decent amount of ICOs could also be categorized as securities. It also stated the exchanges that allow the exchange of such “securities” (or ICOs) need to be licensed securities exchanges. Expect the trading of such tokens to get more sparse as time goes by. The USA was the first to speak on the matter, but it is likely that other countries will eventually develop similar regulations too. Bitfinex recently announced that they are withdrawing from the USA market, and ShapeShift also announced that their legal team would be looking into which tokens the SEC might consider as being securities. Expect most prudent exchanges and companies to eventually take similar actions too.
In summary, although I am sure some ICOs will be successful and their token’s value will increase, at the same time it is likely that there will be more unsuccessful ICOs. Consider taking a decent amount of profits on ICO tokens if you've already made a profit on any certain token. As these realities slowly sink in, the market may turn sour on most ICO token valuations. As always, the risk can be mitigated by putting at least a portion of your cryptocurrency portfolio in other non-ICO alternative cryptocurrencies.