10% of all ICO funds end up stolen: EY

Posted: 23 January 2018 9:36 am


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.

Latest cryptocurrency news

Disclaimer: This information should not be interpreted as an endorsement of cryptocurrency or any specific provider, service or offering. It is not a recommendation to trade. Cryptocurrencies are speculative, complex and involve significant risks – they are highly volatile and sensitive to secondary activity. Performance is unpredictable and past performance is no guarantee of future performance. Consider your own circumstances, and obtain your own advice, before relying on this information. You should also verify the nature of any product or service (including its legal status and relevant regulatory requirements) and consult the relevant Regulators' websites before making any decision. Finder, or the author, may have holdings in the cryptocurrencies discussed.

Picture: Shutterstock

Latest crypto guides

Ask an Expert

You are about to post a question on

  • Do not enter personal information (eg. surname, phone number, bank details) as your question will be made public
  • is a financial comparison and information service, not a bank or product provider
  • We cannot provide you with personal advice or recommendations
  • Your answer might already be waiting – check previous questions below to see if yours has already been asked

Finder only provides general advice and factual information, so consider your own circumstances, or seek advice before you decide to act on our content. By submitting a question, you're accepting our Terms of Use, Disclaimer & Privacy Policy and Privacy & Cookies Policy.
Ask a question
Go to site