ICO portfolio is down by 66% in the first half of 2018

• ICOs claim to have raised US$15 billion in first half of 2018
• Top 10 ICOs listed in 2017 account for essentially all of the gains since issuance

IN THE first half of 2018, 86% of the leading initial coin offerings (ICOs) that listed on a cryptocurrency exchange in 2017 are below their initial listing price and a portfolio of these ICOs is down by 66% since the peak of the market at the beginning of this year, according to a study from EY, Initial Coin Offerings: The Class of 2017 – one year later, that examined the ICOs’ progress and investment returns.

The study finds 30% have lost substantially all their value. There were gains among The Class of 2017 since their ICO, with most gains (99%) concentrated in the top 10 ICO tokens, the majority of which are in the blockchain infrastructure category.

The latest study follows an initial analysis in December 2017, when EY analysed top ICOs representing 87% of the ICO funding last year. It found that a lack of fundamental valuation and due diligence by potential investors was leading to extreme volatility in ICO performance, which is still an ongoing issue.   

The study announced on Oct 24 found that ICOs claimed to have raised more than US$15 billion (RM62.39 billion) in 2018, compared with US$4.1 billion in 2017.  

However, EY found that only 29% (25) of the 2017 ICO projects that EY assessed have progressed to prototypes or working products – an increase of just 13% from December 2017. The remaining 71% have no offering in the market.  

Paul Brody, EY Global Innovation leader, Blockchain, says: “Despite the past year’s hype around ICOs, there appears to be a significant lack of understanding around the risks and rewards of these investments. In addition, there is a disparity between those who invest in ICOs and the ICO project developers regarding the anticipated timelines of ROI.

“While ICOs are an entirely new way to raise capital, those participating should understand that there are factors – such as the slow progression toward working product offerings – that can introduce greater risk in ICO investing.”

Jimmy Ong, partner and Singapore IT advisory leader, Ernst & Young Advisory Pte Ltd explains the value of blockchain: “The hype around ICOs and cryptocurrency has taken attention away from the underlying technology that is blockchain. Blockchains are, first and foremost, an enterprise collaboration technology.

“Instead of cryptocurrencies, the future of payments on the blockchain are fiat currency tokens that can be used as part of complex, multi-party business transactions.”

Utility tokens diminish in value

The study also examined the 25 companies with working products. Of those 25, seven were accepting payment in fiat currency as well as ICO tokens for their product offerings. As a result, customers can make purchases directly without buying the tokens issued in the ICO process, therefore bypassing the community of token holders and diminishing the value of the ICO tokens.

In at least one case, an ICO company has abandoned ICO investors by no longer accepting their tokens (de-tokenizing).

Yuri Gedgafov, EY Tech Media and Telecom Centre leader, Central, Eastern and Southeastern Europe & Central Asia, says: “So far, utility tokens aren’t creating the engaged communities anticipated to coalesce around innovative ideas. In fact, many of the most successful ICOs are mired in litigation or conflict over broken promises and unexpected changes in business strategy with little to no rights for the ICO investor.”

Ethereum platform remains dominant

Ethereum is the dominant platform and shows the highest activity among developers and on social media. While new platforms arise on a regular basis, there is no sign that the new ICO infrastructure projects have had any success in reducing the dominance of Ethereum as the industry’s main platform.

Brody says: “It’s clear that due diligence and awareness of risk are more important than ever. The number of ICOs showing gains since listing on one of the leading crypto exchanges is so limited that it would have required exceptional good fortune or a visionary portfolio strategy to have made any gains investing in the 2017 ICOs. At the moment, the level of reward in this market doesn’t look like it justifies the risks involved.”