The auditing firm Ernst & Young has published an update on its ICO analysis from 2017. In this year’s report they analysed the progress and return of the 372 ICOs. The conclusion is – modest.
The ICO investment volume shows the most positive development. This is already higher than the total volume in 2017 in the first half of the year. In contrast, however, the return is clearly negative. The majority of the ICOs analysed (approx. 94 percent or 132 ICOs) are in the red. Approximately one third of these (approx. 43 ICOs) even fell by more than 90 percent.
One possible reason for this poor performance is the lack of market maturity. Although this year around ten percent more ICOs have an operational product (or prototype) than in 2017, 70 percent are still in the idea stage.
The trend towards delisting and few winners
But even ICOs with functioning products are not necessarily positive for investors. Because many projects increasingly rely on fiat currencies as a payment alternative. As a result, they devalue their tokens. Seven of the 25 market-ready ICOs accept US dollars in addition to their own utility tokens. Digipulse is taking the most extreme step. In August, the company announced its delisting; as of 15 December, the DGPT token will no longer be tradable. The price has levelled off at zero since the announcement.
Another extreme can also be seen in the profits. The top 10 ICOs generate 99 percent of all net earnings. Not surprising is the sector distribution: the narrow majority of the highest-yielding ICOs are blockchain platforms.
Conclusion and outlook
As is usual with young technologies, many experiments fail. And ICOs are no exception. However, their lack of market maturity is worrying, especially as they have raised a lot of capital. It seems, according to the auditors, that ICO investments are even more risky than traditional venture capital. One of the reasons for this is the lack of product development. Based on this, analysts expect private investors to withdraw from ICO investments and more qualified investors (e.g. funds) to replace them.
Although the report does not address this, the reasons for the lack of product development are helpful in assessing returns more accurately. The true causes are likely to remain unexplained. Probably, however, is a combination of fraud and misjudgement by companies. For example, many ICOs have underestimated complexity and overestimated demand. And possibly the time-to-market for blockchain companies is also simply longer than a year. An indication of this is the (relatively) good return on investment of blockchain platforms. Because many applications depend on scalable blockchains, they are forced to wait and are unable to bring their products to market.
Ernst & Young will publish another follow-up report later this year. Maybe by then, scaling solutions like Liquid will show first successes and give blockchain applications the necessary basis to bring their products to market.