2017 was undoubtedly the year of cryptocurrency, as exploding interest in bitcoin fueled massive market growth. The interest wasn’t limited to crypto-trading as the number of businesses using the token sale as a mean to raise funds also increased dramatically. This process – generally known as the initial coin offering or ICO, has become an innovative instrument for startups to raise money for their projects.
Over the last 3 years, businesses raised roughly $5 billion from ICOs. In 2016, startups raised roughly over $250 million from token sales, but the amount soared up in 2017 when over 200 startups raised $4 billion through ICO.
However, a report released last week by Bitcoin.com, suggests that only 56 percent of those ICOs were sustainable and profitable and that a considerable amount of the startups failed to execute their vision effectively as well as falling prey to hackers. Given the growing regulatory measures taken by states and institutions, many people feel that the future of ICOs is uncertain – and that the cryptocurrency market is going to experience some turbulence in the longer run.
In this article, we are going to discuss not only the top 10 ICO failures of 2017 but also understand the fundamental reasons behind these failures. This should enable the readers cut through the noise and make an informed opinions on how to run an ICO the right way and support projects wisely.
1. The DAO
DAO or the Decentralized Autonomous Organization is one of the best examples of a well-known ICO failure. The idea behind the DAO was to offer a decentralized business model for businesses and non-profit transactions. This promise brought in a flurry of investment when the ICO was announced and brought in a record-breaking amount of capital at $168 million.
If we look into the reasons behind its failure, cybersecurity tops the list. A cyber-attack exposed a critical vulnerability in their smart contract, leading to a loss of $50 million. When the news spread, the negative wave couldn’t be stopped and the failure was the end result.
Had they done their due diligence and followed the latest cybersecurity protocols, as well as ensuring the security of their wallets and contracts, their failure could have been avoided entirely.
Tezos was designed as a self-governing, decentralized Blockchain by establishing a true digital commonwealth. Despite the fact that they were one of the most successful token sale campaigns in ICO history, they fell prey to simple managerial conflicts. However, we cannot dub them as 100 percent failure because the company is still alive, and trying to rebound.
The primary reason behind the failure is cited as the conflict between management, which cost them 75 percent of the ICO value within few hours. Even today, they are fraught with lawsuits and an unending conflict of interest that doesn’t look well.
The best thing about this ICO was that it was an innovative product idea. Ahoolee was the world’s first search engine for products giving a comparative overview of a products’ pricing in the global online stores. This was done using a distributed platform that collects and indexes information open source, and authenticated it using blockchain technology.
Their product (which was a brilliant idea) is taken as the key reason behind their failure. Many analysts do not count them in the list of failures because the startup is still working on the product, and fixing the issues identified so far. Failure to execute has cost them time and has relegated their position in the market.
Ahoolee’s CEO, Sergy Ryabov says: “What are we going to do next? We will repack the product. Perhaps we will rebrand it. Bring the globality of our idea to investors. We will conduct the pre-sale and ICO according to the usual market scheme, attracting large investors in advance.” Therefore, we assume they might bounce back very soon.
Enigma is a cryptocurrency that heavily marketed their encryption methods, often self-proclaimed as being the securest digital currency. However, to the surprise of many, Enigma was hacked right before their initial coin offering, leaving the team embarrassed.
The hackers were able to steal $500,000 worth of Ethereum, hacking their mailing list, website, and Slack accounts. In fact, they used Slack to reach out to investors for an early (fake) ICO, which trapped many investors, though some of them were able to smell the scam and avoided sending in funds.
OneCoin was an infamous ICO that was dubbed as a scam. It had all the obvious makings of a Ponzi scheme yet managed to trap a number of investors and cost them $350 million. The team had little credibibility to show investors, and certainly no working MVP. Once the scam was confirmed, police raided their meet-up and arrested around two dozen people, including some key team members and developers.
OneCoin and other successful Ponzi schemes highlight one key deficiency in ICO investments. The investors didn’t do a proper background check on the startup and the team. In this case, most of the people on the team had previously been linked to other scams previously.
On August 21st last year, the General Prosecutor’s Office of Ukraine exposed the fraudulent Swisscoin project, whose creators were suspected of embezzling investments worth more than $500,000. SwissCoin creators (citizens of Ukraine and India) promised to develop a system of instant, virtually interest-free payments anywhere in the world, but no white paper was published. In addition, there was no detailed information about the developers and team.
Following the crackdown, all participants of the project were arrested and they face imprisonment of up to 12 years with confiscation of property.
Branding themselves as “the first Decentralized Space Company,” SpaceBit announced their idea in 2014. The company wanted to launch several “nano-satellites” into orbit to enable global blockchain access. Unlike their competitor Qtum, the company couldn’t materialize their dream, and the founders started another Blockchain company named BlockVerify.
Like many other blockchain companies, PayCoin started with an interesting idea and whitepaper that talked about building a new breed of cryptocurrency. However, when the ICO stage came closer, the developers rushed it out as another generic altcoin clone. They were hoping to hit the market and pump up the value of their coin, and they were quite successful in the launch phase.
However, after the launch and big boom in market capitalization, the team couldn’t keep their promises, and the project started to capsize.
Droplex was one of the most ‘successful’ scams in the ICO world. They tried to start it off well but when their whitepaper was found out to be the exact and word for word copy of QRL’s white paper, investors lost their interest. Droplex couldn’t materialize on the vision or bring in anything original, making roughly $25,000.
CoinDash is one of those token-sales that fell victim to hacking and had to abandon their project. They raised only $6.4 million but admitted being hacked out of $7 million. While the exact method of the hacking is uncertain, some sources speculate that hacker created an identical website and misled the investors. Another view is that the hacker simply changed the payment address, and the funds got diverted.
What’s the Way Forward?
While the listed failures do portray a negative picture, they are half the story with lots of lessons to learn. At InWage, we believe that the future of ICOs is bright and the latest data endorses this. According to researchers at ICO Box, around 250 ICOs were conducted in January 2018, with the top 100 raising a combined $1.7 billion.
Initial reports for February that the number is at par with January, excluding the Telegram app’s ICO, which has raised over $1.6 billion in two sales offerings. Looking at the trends, ICO Box estimates that total funds raised could easily hit $21 billion by the year-end.
However, we do not imply that there are no issues or scams. It’s just that startups and investors need to take extra care, conduct due background check, and follow the best practices to avoid getting trapped. If you want to learn more about how to do a successful ICO, get in touch with our team, or read the ICO guide by our founder – Jonathan Chester.