ICOs are looking like a rubbish investment – just ask Michael Clarke
Former Aussie cricket captain Michael Clarke was the face of a rejected ICO. Pic: Getty
When it comes to failed Initial Coin Offerings former Aussie cricketer Michael Clarke is far from alone.
Last week the corporate regulator shut down a $50 million ICO backed by Clarke — but data from consultancy EY suggests it probably would have failed anyway.
An ICO is like an initial public offering — but instead of offering shares, an issuer offers digital tokens that can be traded on cryptocurrency platforms or swapped for services.
Last week consultancy EY revisited 90 global ICOs that it first tracked a year ago — and found almost a third were now worthless — while 86 per cent were underwater on their issue prices.
Almost all the gains were made by just 10 of the ICOs — but even the successful companies were “mired in litigation or conflict over broken promises and unexpected changes in business strategy”, reported EY.
In Australia ASX-listed ICO consultant DigitalX (ASX:DCC) has been at the centre of a legal storm over its involvement in a health-oriented ICO. DigitalX denies any wrongdoing, and has previously said it intends to vigorously defend the matter. The matter is now in mediation.
There are 76 Australian-based ICOs listed on ICO rating platform ICOBench, with another 17 planned to close until February 2019.
But Stockhead could find no record of 60 of those ICOs trading on any digital exchanges.
Stockhead found that only 16 of those 76 Aussie IOC tokens are still trading.
Of those, just four are trading above their issue price: Incent (up 268 per cent), Power Ledger (up 275 per cent), ClearPoll (up 86 per cent) and HorizonState (up 9 per cent).
ICOs attract big money
ICOs and spin-off concepts such as utility coins and security tokens (see here for an explainer on these) raised $US4.1b in 2017 — and a whopping $US15b in 2018 already, according to EY.
But on the whole they offer rubbish returns for investors, EY’s data shows.
An investor purchasing a portfolio of the ICOs examined by EY in January 2018 “would most likely have lost 66 per cent of their investment”, EY said.
One problem is a lack of fundamental valuation and due diligence by potential investors.
That is causing the extreme volatility in ICO performance.
“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 EY blockchain expert Paul Brody.
He says investors and project developers have different ideas about when return on investment should happen.
“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.”
Mr Brody says the number gainers is so limited the risks of ICO investing aren’t justified by the reward.
EY found that only 25 of the 2017 ICO projects they assessed have progressed to prototypes or working products. The other 61 have nothing to show in the market for their fund raising.
EY also noted that some of the 25 companies were also accepting regular cash for their services, bypassing the token holders and diminishing the value of their tokens. In at least one case the company had even gotten rid of the tokes altogether.