10% of all ICO funds end up stolen: EY
Congestion, criminality and confusion mean initial coin offerings remain high-risk.
Typically 10% of the funds raised during initial coin offerings (ICOs) end up being stolen, posing a threat to the long-term viability of this method for launching new cryptocurrencies, according to research from EY.
The study found that US$3.7 billion has been raised across 372 majors ICOs, but that close to US$400 million of that funding had been stolen through phishing attacks, attacks on exchanges and wallets and other methods.
ICOs also remain highly risky, with unclear valuation methods, network congestion and a lack of regulatory certainty all contributing to an uncertain future for the sector, the report said.
"As ICOs continue to gain popularity and leading players emerge globally, there is a risk of having the market swamped with quantity over quality of investments," EY's global innovation blockchain leader Paul Brody said in a statement announcing the study.
One key issue is how ICOs determine valuations. "Current token valuation is more like a gold valuation or a fashion item in high season when a limited supply cannot meet high demand," the report said. "With balanced demand and supply, the valuation would be determined by project forecasts and token nature. But in most cases, it is determined by hype, white paper quality and token sales techniques."
Many ICOs also rely on "fear of missing out" (FOMO) as a driver to sign up potential coin holders, the report found. Cognitive bias is a major issue for cryptocurrency speculators. That rush to buy into new ICOs means some have seen capital contributed at more than US$300,000 a second, the report said.
ICOs remain a relatively new form of investment, with Australia only seeing its first in October 2017. However, enthusiasm may be waning, with EY's analysis suggesting just 23% of schemes reached their goals in November 2017, compared to 93% in June.
The EY study also suggests that "utility tokens" – currencies designed to serve a specific application, like TRON or PronCoin, are likely to fail as those needs can be met by more general-purpose cryptocurrencies. "Indeed, for companies that record their revenues and expenses in dollars or euros, settling intercompany liabilities with a volatile specialised currency adds complexity and risk without significant benefits," the report notes. "The core technologies and benefits of blockchain technologies can be applied to business operations without having to use proprietary digital currencies."
To date, successful ICOs have been dominated by projects using Ethereum, which accounted for 70% of projects that had raised 87% of total ICO funds. One consequence of that has been congestion on the network, though EY predicts that will improve eventually.