With the sale of digital coins, start-ups have taken many billions of dollars of capital last year. For the financiers, however, that has by no means paid off according to a study.

In August 2018, Digipulse declared himself a victim of a hypeship, which it was co-fired with. At the end of 2017, the start-up acquired approximately $25 million in an Initial Coin Offering (ICO) through Ethereum blockchain platform to build a secure digital asset inheritance service. But other ICOs were in demand at that time, so the price of Ethereum units shot up. This, in turn, meant that the use of the network became too expensive for Digipulse.

So the young company was radically re-thinking: Instead of storing it in a blockchain, data is now classically stored on cloud servers, and those who want to use the service can only pay in dollars instead of using crypto-money. So you can confidently consider the Blockchain plans of Digipulse as failed.

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Higher risks with ICOs

Nevertheless, the company is one of the positive exceptions in the ICOs of 2017, because after all, it still exists and has developed a specific product. The majority, on the other hand, sees things differently: The audit firm looked at the 110 largest ICOs in 2017 and found that 71 percent of them had neither a finished product nor a prototype until October 2018.

Also, the value of the digital coins they issue was well below their first market price in the vast majority of cases — here Digipulse is no exception. Anyone who would have invested in a portfolio of the examined ICO coins on January 1st, 2018, would have recorded a loss of 66 percent until October.

“ICO-funded companies seem to be at higher risk due to a number of factors,” the EY experts wrote.

Researchers at Boston College had calculated this summer that investing in ICOs on average yield high returns. But this consideration covered only a short period. As things stand now, the more experience with ICOs, the more disillusionment it gets.

Up and down again

In keeping with this, the ICO hype — along with the price losses in most cryptocurrencies — seems to be gradually slowing down. Although in the third quarter of 2018 with ICOs still added about 2.4 billion dollars. However, that was only half as much as in the previous quarter and only about a fifth of the volume in the first quarter, which had been at nearly $11.5 billion.

In fact, the numbers found by EY are not as bad as they might seem at first sight. 71 percent without a product or prototypes, in turn, means that at least 29 percent of ICOs have already implemented their plans.

Alex Lielacher of the crypto-market research firm Brave New Coin refers to this point. He compares ICOs with “seed funding,” the first start-up financing by venture capitalists — in this phase, normal start-ups usually have to offer only speculation and theoretical considerations.

Not unlike other startups

While the number of seed-funded projects in the US has grown rapidly since 2009, there has been little increase in follow-on financing.

For Lielacher this shows how difficult it is not just for ICO-funded companies to get from the start-up phase to a marketable product. He points out that according to a rule of thumb from the venture capital industry, around 90 percent of all start-ups financed by it fail. Against this background, the previous success rate of the ICOs examined by EY is no longer so frightening.

The EY experts also point out that many companies have failed in previous technical revolutions. And for those who fared better, it took a while for them to mature enough to be considered an investment for a wide range of investors. In the meantime, according to their forecast, interest in ICO will probably shift from private investors to professionals “who know what downside risks exist and can handle them”.

Marko Vidrih

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