Big risks in ICO market

flawed token valuations, unclear regulations, heightened hacker attention and congested networks

 - "Fear of Missing Out" (FOMO) drives token valuations without any connection to market fundamentals

- Investor demand for initial coin offering (ICO) projects remains high, but the ability to reach fundraising goals has been declining since mid-2017; down to 25% of projects in November from 90% in June  

- Speed and size of market draw hackers' attention with 10% of ICO funds lost or stolen

LONDON and PALO ALTO, California, Jan. 22, 2018 /PRNewswire/ -- A lack of fundamental valuation and the due diligence process by potential investors is leading to extreme volatility of the initial coin offering (ICO) market, according to new research published by EY. The research also found that in some cases ICO investors are contributing capital at an average rate of over US$300,000 per second.

The EY research, which studied 372 ICOs around the world, also found that the offerings raised US$3.7b¹ in funds, twice the volume of VC investments in blockchain projects. Furthermore, the US is leading the race with the highest volume of ICOs originating from the country (over US$1b). Russia and China follow, with each over US$300m.

Paul Brody, EY Global Innovation Blockchain Leader, says:

"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. These high-risk investments and the complexity of ICOs need to be managed to ensure their credibility as a means of raising capital for companies, entrepreneurs and investors alike."

Utility tokens

One of the key findings from the EY research is that there may be no business need for many of the utility tokens being offered. Utility tokens are essentially a form of application-specific currency that blend the technology features of blockchains with a speculative component for investors where the tokens' value will rise as usage increases.

In most cases, however, there is no need for an application-specific exchange token. Indeed, for companies that record their revenues and expenses in dollars or euros, settling intercompany liabilities with a volatile specialized currency adds complexity and risk without significant benefits. The core technologies and benefits of blockchain technologies can be applied to business operations without having to use proprietary digital currencies.