LONDON — Money continues to flood into the booming market for digital tokens issued by startups despite declines both in the quality of the projects seeking funding and in the investment returns, according to a new report.
Fifty-five percent of so-called initial coin offerings failed to complete in the second quarter, according to a report from the agency ICORating. That was 5% more than failed in the first quarter.
ICOs are a fundraising method in which companies and projects issue digital tokens structured like bitcoin or Ethereum. These tokens are sold in return for cash used to fund the development of the seller's businesses. ICOs exploded from almost nothing to be a multibillion-dollar market in 2017, surging in popularity alongside the rise in the price of bitcoin.
The increasing failure rate came despite a rise in the amount of money being invested into ICO tokens. The report said 827 projects raised $8.3 billion through initial coin offerings in the second quarter of the year, compared with $3.3 billion in the first quarter.
This mismatch led ICORating to conclude that "the overall quality of projects has significantly worsened." Fewer projects are attracting bigger sums, while many others languish with small sums or outright failure. The biggest ICO in the second quarter of 2018 was PumaPay, a cryptocurrency solution for merchants that raised $117 million in May.
The increased investment into ICO tokens comes despite poor performance in the second quarter. ICORating found the median return for tokens in the second quarter was a 55.5% loss, compared with a 49.3% gain in the first quarter. Bitcoin, the bellwether for the crypto and digital asset market, has declined over 50% this year.
North American startups attracted the bulk of funding, taking in 64.6% of the total raised in the quarter. Financial services continued to be the most popular sector for startups, with 87 ICOs focusing on the industry.
Separately on Wednesday, the blockchain-focused venture-capital firm Outlier Ventures released a report saying venture capitalists invested $1.8 billion into blockchain-focused businesses in the second quarter of the year. Most ICO projects use blockchain technology in one way or another, though most VCs still invest in equity rather than by buying tokens issued during an ICO.
Outlier Ventures' review of activity in the blockchain space found an increase in mergers-and-acquisitions activity among startups. Tron acquired the torrenting service BitTorrent for $140 million in June, for example. Tron aims to decentralize the entertainment industry and raised $70 million through an ICO last December.
"We are seeing extremely well-capitalized protocols launch venture funds and accelerators as well as acquire equity-backed companies and teams to scale development or buy network-market-fit," Jamie Burke, the CEO of Outlier Ventures, said in a release.
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