Around 78% of initial coin offerings (ICOs) are somehow fraudulent in nature, a report by a leading firm has found.
The statistics from SATIS Group, a firm which advises ICO organisers, split a sample group of ICOs into several different categories in order to work out what proportion were legitimate investments.
A total of 78% of the ICOs analysed were placed in the largest category: “identified scam”.
A further 4% of ICOs were described as failed, while another 3% were labelled as “gone dead”. Only 15% of the ICOs considered actually reached the stage whereby they were traded.
Despite the very high number of ICOs described as scams, there is also evidence that investors are steering clear of them in droves.
The same report found that under 10% of cash devoted to ICOs by investors ended up in the hands of the fraudulent ICO organisers, suggesting that despite its flaws, the market is actually well-insulated against the impact of scammers.
Overall, the report found that more than 70% of total ICO funding was directed towards schemes that were labelled as “higher quality”.
An ICO is a way for the founders of a blockchain-based project to raise the funds they need to get started. They operate in largely the same way as an initial public offering, or IPO, does in the traditional stock market. However, while they are a fundraising vehicle, they also often have a community-based ethos and they can sometimes resemble a crowdfund rather than a typical investment opportunity.
Some legitimate cryptocurrencies and related blockchain-based projects have been founded through ICOs. In 2015, for example, the cryptocurrency Ethereum was set up through an ICO. However, ICOs have come under scrutiny recently, and this is not the first major report to find problems with the way the market is functioning.
In May of this year, for example, The Wall Street Journal released a report which it claimed showed widespread deception in the ICO market. The newspaper analysed just under 1,500 ICOs and found that over 270 of them had some risky characteristic or another associated with them, including pledges that profits would be certain.
And a report released earlier this month from Bloomberg, which published the main report by SATIS Group, covered a Boston College study which revealed surprising statistics on many ICO-focused companies’ longevity. Using Twitter as a source, the report found that just under half (44.2%) of startups with an ICO focus were still in business 120 days after their ICO ended. This leads to investors selling their coins as soon as they buy them in an attempt to make a fast profit, which can reduce confidence in the market even further.
“What we find is that once you go beyond three months, at most six months, they don’t outperform other cryptocurrencies,” said Leonard Kostovetsky, one of the researchers on the project.
SATIS Group is a regular producer of reports on cryptocurrencies. Future releases which the group plans to publish include reports on market composition, custody and trading, and valuation.