More than 10 percent of the funds raised by initial coin offerings (ICOs) have been lost or stolen, according to research published by Ernst & Young (EY). The study, which looked at 372 ICOs taking place around the world, found that $400m of the $3.7bn raised to date had been refunded to investors due to losses caused by cyber criminals.
Unsurprisingly, the rapid growth of the ICO market has drawn the attention of hackers, with many keen to take advantage of the lack of a centralised authority and the potential naivety of early adopters. Security is rarely a priority during the early stages of an ICO, leaving project founders and investors open to a number of exploits, particularly phishing attacks.
Paul Brody, Global Blockchain Innovation Leader at EY, believes the ICO market is becoming a victim of its own hype. Some businesses are managing to attract millions of dollars in investment despite poor-quality white papers, obvious coding errors and the lack of a viable product.
Security is rarely a priority during the early stages of an ICO, leaving project founders and investors open to a number of exploits, particularly phishing attacks
“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,” Brody said. “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.”
Another key takeaway from the EY research is the fact that, in many cases, there is no clear business justification for the creation of a new cryptocurrency. This only reinforces the view that many ICOs are highly speculative affairs. The fact some countries have taken steps to ban ICOs altogether introduces another element of risk for investors to consider.
However, ICOs are not completely without merit. The use of blockchain technology can improve project transparency and reduce risk, while the ICO method gives founders faster access to capital. That said, it is important investors don’t get carried away.
ICOs may be new, but tried and tested investment principles still apply. Be sure to read white papers carefully, look into the background of those involved and ask yourself if there is a need for another digital currency. Whether engaging in an ICO, IPO or any other investment method, always carry out due diligence before you consider parting with your money.