More than half the cryptocurrency startups that have raised money by selling tokens have failed within four months of their initial coin offerings (ICO), according to a new study.
An ICO is along the lines of an IPO (Initial Public Offering) and is the means through which new cryptocurrency ventures raise funds. ICOs are unregulated and are often used by companies to bypass the stringent norms of raising money from private equity and venture capital firms as well as banks.
The study, which was carried out by Boston College and accessed by Bloomberg, analysed tweets from the startups’ Twitter handles to draw conclusions about sustainability.
The researchers, Hugo Benedetti and Leonard Kostovetsky, studied over 2,400 ICOs completed before May this year. They found that only 44.2% of the startups sustain beyond 120 days after their ICOs have concluded.
Kostovetsky is an assistant professor at Boston College’s Carroll School of Management, and Benedetti is a finance PhD student at the school.
Kostovetsky told Bloomberg that acquiring coins from a startup’s ICO and selling them on the very first day is a safe and lucrative investment strategy.
However, many investors can’t participate in the ICOs as they are only open to a select few. The study observed that the next best move is perhaps selling the coins within the first six months.
"What we find is that once you go beyond three months, at most six months, they don’t outperform other cryptocurrencies," Kostovetsky said. "The strongest return is actually in the first month."
Kostovetsky pointed out that the returns for people selling their tokens on the first day of listing have been declining at a rate of 4% a month, even as crypto startups have begun shrewdly pricing coin offerings and more people are jumping into ICO investments.
"They are much lower now, so I wouldn’t expect them to continue to decline at this rate," Kostovetsky told Bloomberg.
Other studies have also pointed out that investing in ICOs is a risky proposition. Coinopsy, a coin/token researching website, reported that more than 1,000 tokens have failed to date.
Indian companies have also jumped on the ICO bandwagon. Earlier this year, Mumbai-based AS JustRide Tours and Travels Pvt. Ltd, which operates peer-to-peer car and bike rental platform Drivezy, raised $5 million in the first round of its ICO by offering tokens called RentalCoins.