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David Drake

July 15, 2018 Article

The Real Reason Many ICO Projects have a Low Success Rate

Initial coin offering (ICO) is an effective way to raise capital for blockchain-based projects. This method of crowdfunding has experienced fast growth with ICO companies, crowdsourcing $13.7 billion over the last 5 months. This is more than double the amount raised through ICOs in 2017.

ICOs are structured in such a way that companies popularize ideas on innovative application of blockchain to solve problems in different sectors. For instance,
URAllowance is utilizing blockchain to improve communication between parents and their children while IOU is running a blockchain solution to improve customer satisfaction in the e-commerce space.

In the world of sports,
SportsFix is improving the experience that sports fans have when accessing sports-related content. Another company, Bitque, is facilitating peer-to-peer exchanges between cryptocurrency traders, an aspect that is likely to provide flexibility in the highly decentralized environment. But not all ICO projects become successful. According to data availed by sites such as DeadCoins, more than 1000 digital coins created through ICO projects are non-functional. This translates to loss of money for investors who supported the projects during their ICO campaigns.

Key Factors
While the number of spam ICO projects has risen, several factors may be associated to unsuccessful implementation of ICO projects. The first one is poor planning. In some instances, ICO projects fail to actualize their ideas and meet investor expectations because they underestimate the resources such as equipment, staff and finances they need to execute their ideas.

Alex Karasulu, founder and CTO of OptDyn, makers of Subutai Peer-to-Peer Cloud computing platform, says “ICO project failure becomes ultimately apparent after missing milestone deadlines. Even though other indicators shed light, nothing is more revealing than not delivering. The delayed failures of those initial ICOs during the “
wild west” period is what the industry is witnessing now after their first (and second) milestones have long passed”.

Administrative failures have also cost ICO projects dearly. In some cases, ICO organizers fail to register their project websites and accounts, exposing them serious security attacks where high amounts of cryptocurrencies are lost to hackers. At the same time, investors are not able to foresee the final application and use of tokens from the start in many instances. Having clarity on this is critical in determining the success or failure of ICOs projects.

According to Thomas Labenbacher, the CEO and co-founder
Bank52, a high number of ICOs launch without having a ready products in place. At the same time, ICO investors want to invest in projects that give them returns. Where an ICO project is devoid of a viable projects, investors have limited options, so they are sell the tokens they hold and wait to invest in the next ICO.

Prevention Measures
Despite high risk, there is a high possibility for well planned ICO companies to actualize their blockchain innovations and become successful. According to Antonio Sainz, co-founder and CEO of INCLUSIVITY, having a long-term perspective can increase the chances of success for ICO projects.

He says, “In the first place, we are facing the birth of a new industry, we all have to learn, we have to stop looking at the ‘wow effect’ and see in depth the future of each project, more as a company than as a short-term result. We have to remember that the short-term point of view was one of the causes of the last international crisis. Invest in the future, invest in projects that can create companies and generate value in the future”.

Proper regulation is necessary if ICO projects are to succeed. ICOs will continue to gain popularity hence the need to put clear mechanisms for examining and managing the tokens and coins that are created by ICO projects.

Reginald Ringgold, founder of BlockVest DEX says, “Apparently the market does not value new types of complex digital securities correctly. For this reason, it is necessary to establish rules for the registration of new types of digital securities”.

He adds, “Securities, unlike food, should be given risk-related labels. The prevailing portrayal of economic behavior in economic theory is based on very strong assumptions of rationality, which are not fulfilled in reality. If economic subjects were completely rational, as defined in economic theory, the markets could be left to their own devices without the risk of development of serious and long-lasting imbalances”.

 Disclaimer: David Drake is on the advisory board for most of the firms mentioned or quoted in this article.

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