If you invested in an initial coin offering (ICO), a crowdfunding tool for crypto-related ventures, in 2017, there’s a very good chance your portfolio has been shredded, according to research from professional services firm Ernst & Young.
In an Oct. 19 report titled “ICOs, The Class of 2017—one year later” Ernst & Young said in the first six months of 2018, 86% of the leading ICOs that listed on a crypto exchange in 2017 are below their initial listing price. Furthermore, a portfolio of these ICOs is down by 66% since the peak of the market.
A lack of investor due diligence and poor understanding of the nascent, and often disingenuous market, drove ICO valuations to extreme levels, creating a severe case of FOMO (fear of missing out), which eventually popped, the report said. “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,” said Paul Brody, Ernst & Young global innovation leader, Blockchain, in the report.
“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.”
This excessive risk taking saw the total value of all cryptocurrencies soar to more than $800 billion in January before nose-diving below $600 billion as the price of major cryptocurrencies like bitcoin BTCUSD+0.84% and Ether ETHUSD+1.61% lost more than half their value.
Furthermore, Ernst & Young estimate that 30% of all ICOs have lost “substantially all their value.” This follows a February survey from news.Bitcoin.com that said 46% of all 2017 ICOs failed at either the funding or business stage.
But investors look to be wising up. Whether it’s growing regulatory oversight or documented failures, the deluge of money to the alternative crowdfunding tools is on the decline. Of the $21.4 billion raised in 2018 to-date, $17.2 billion was in the first six months. July, August and September were three of the five slowest months, according to data from CoinSchedule.
Even so, Brody said those contemplating a dabble in the ICO market should tread with caution. “At the moment, the level of reward in this market doesn’t look like it justifies the risks involved,” he said.
The survey collected data on projects that have conducted ICOs and performed a detailed analysis of the top 141 projects, which collected 87% of all ICO proceeds, between January 2018 and September 2018.