Common Reasons Behind Failed Initial Coin Offerings

By Smoljanović | Smoljanovic | 27 Jun 2023

Common Reasons Behind Failed Initial Coin Offerings

Initial Coin Offerings (ICOs) revolutionized the fundraising landscape by providing a new way for projects to raise capital through the issuance of tokens. However, not all ICOs have been successful, and the majority have ended up in failure.

Snippets contained in this article may have been covered in my five articles on Publish0x covering Privacy Coins, CBDCs, DAOs, Smart Contracts, and Layer-2 Solutions, and can be used for reference if necessary. This post about ICOs stands alone, because attempting to cram six topics into a single article would not be conducive to understanding and possibly create confusion.

An initial coin offering or ICO is a popular way for blockchain startups to raise funds. Companies issue their own digital tokens, which can then be bought by investors and speculators hoping the value will go up in the future. However, the majority of ICOs end up failing for a variety of reasons. Although there is a myriad of possibilities, here are six of the most common reasons why ICOs fail:

1. Lack of a Solid Business Model:

One of the primary reasons ICOs fail is the absence of a viable and well-defined business model. Ill-fated projects jump into the ICO process without thoroughly researching their target market, understanding customer needs, or identifying a clear revenue generation strategy. Without a solid foundation, such projects struggle to gain traction and fail to deliver on their promises.

To cite one example, the "Useless Ethereum Token" (UET) launched in 2017 with a candid admission that the token had no value or purpose. Despite the honest approach, UET raised a significant amount of funds before inevitably fading into obscurity.

As a precautionary measure, entrepreneurs should develop a robust business plan, conduct thorough market research, and demonstrate a clear value proposition to attract investors.

2. Lack of Transparency:

Transparency is vital for establishing trust in the cryptocurrency space. ICOs that fail to provide transparent information about their team, project roadmap, and token distribution plan often face skepticism and struggle to gain investor confidence. Hidden or unclear intentions raise concerns and may lead to project failure.

Citing a transparency example, the "Confido" ICO promised to create a blockchain-based platform for escrow services. However, after raising funds, the project's founders disappeared, and the ICO was revealed to be a fraud.

So yeah, ICO projects should prioritize transparency by providing comprehensive and easily accessible information about their team, project progress, and token distribution details.

3. Regulatory Compliance Issues:

The lack of regulatory clarity in the cryptocurrency space has posed significant challenges for ICOs. Failure to comply with relevant laws and regulations can lead to legal consequences, project shutdowns, and loss of investor trust. Governments around the world are increasingly introducing regulations to protect investors and combat fraudulent ICOs.

To cite further examples of fraudulation, the SEC crackdown on fraudulent ICOs led to the demise of projects like "Munchee" and "Plexcoin," which faced legal action for conducting unregistered securities offerings. No, yeah, fraudulation is not actually a word used anywhere outside of this article.

It is imperative that ICOs should seek legal counsel and ensure compliance with applicable regulations in the jurisdictions they operate in, implementing know-your-customer (KYC), not (KFC) and anti-money laundering (AML) procedures when necessary.

4. Unrealistic Promises and Overhyping:

ICOs that make grandiose claims, promise unrealistic returns, or use aggressive marketing tactics often fail to deliver on their lofty expectations. Overhyping a project may attract investors initially, but when reality sets in and the project fails to meet those exaggerated promises, investor sentiment quickly sours. Countless number of ICOs are launched without a viable product or use case for the token. They rely purely on hype and speculation to drive token sales. But without real adoption of the token or platform, interest quickly fades and the value plummets. A token needs to have a clear utility and purpose to succeed.

In one case, "BitConnect" gained significant attention and investment by promising daily returns and a lending platform. However, the project eventually collapsed amidst allegations of being a Ponzi scheme.

So yeah, ICOs should maintain honesty and integrity, avoiding exaggerated claims and focusing on realistic goals and achievable milestones.

5. Weak or Inadequate Development:

Successful ICOs require a strong technical foundation. Projects that lack skilled developers, robust infrastructure, or fail to deliver on their product roadmap are likely to lose investor confidence. Inadequate development and delays in product launches can lead to dwindling interest and token devaluation.

As previously mentioned in my DAO article, "The DAO" raised a record-breaking amount during its ICO, but a critical smart contract vulnerability led to a significant hack and subsequent loss of funds. This event ultimately resulted in a hard fork of the Ethereum blockchain.

It is crucial that ICO projects prioritize building a competent development team, conducting thorough security audits, and ensuring the reliability of their product before launching.

6. Lack of real utility or adoption

Many ICOs are launched without a viable product or use case for the token. They rely purely on hype and speculation to drive token sales. But without real adoption of the token or platform, interest quickly fades and the value plummets. A token needs to have a clear utility and purpose to succeed.

Conclusion

While ICOs have paved new avenues for fundraising and innovation, they come with inherent risks. Understanding the pitfalls that have led to ICO failures is essential for both entrepreneurs and investors. By learning from past mistakes, the cryptocurrency community can foster a healthier and more sustainable ICO ecosystem. Transparency, regulatory compliance, realistic expectations, strong business models, and technical competence are key factors that can contribute to the success of future ICOs.

Blockchain projects are notoriously complex to build and scale. ICOs that experience major technical issues, hacks, or failures tend to lose momentum and investor confidence fast. Technical execution and security are key to the success of any blockchain startup.

So yeah, while ICOs raised billions of dollars in recent years, the majority have failed for the reasons not limited to those I mentioned above. Credibility, proper token design, technical expertise, and long-term strategic vision are all key ingredients to ICO success, and the lack of any can quickly lead to failure. With tighter regulations and savvier investors, the bar for a successful ICO continues to rise.