Parallels with the collapse of the tech bubble, analysts say
In an echo of the carnage following the collapse of the 1990s tech bubble, the cryptocurrency industry will see a significant number of additional projects fail, said one asset management firm.
Element Digital Asset Management said that while the recent drawdown of around 78% in the total value of cryptocurrencies from its peak matches the drop by the Nasdaq-100 Index NDX, +0.04% following the bursting of the internet bubble, the cycle hasn’t ran its course, and investors in small projects should expect further disappointment.
“An analysis of historical project failures suggests that maximum pain in the altcoin market has not yet been felt. Investors should expect a total loss of investment in certain coins as projects eventually fail and get delisted,” wrote Thejas Nalval, Elements portfolio director, and Kevin Lu, the firm’s director of quantitative research.
Altcoins, are coins other than bitcoin BTCUSD, +0.38% the worlds biggest digital currency.
Element evaluated the top 100 coins by market cap at the beginning of each year from 2015 through 2018 and found that a significant number of ventures had ceased operations. Of the top 100 ventures at the beginning of 2015, more than one-third were no longer running.
Despite the failure rate, it has not stopped an abundance of cash pouring into the initial coin offering market. After raising $6.2 billion in 2017, ICOs have raised $18 billion in 2018, to date, according to data from CoinSchedule. All this as warning signs grow.
An ICO is a crowdfunding tool used by cryptocurrency-related ventures that issue investors coins instead of stock.
Crypto-guru Barry Silbert told onlookers at the CNBC Delivering Alpha conference in July that 99% of cryptocurrencies would fail, and more recently, analysis from Diar, a blockchain data and analytics firm said close to $100 million had been swindled from investors by ICO promoters either before or during launches, in what’s known as an exit scam.
So how to pick a winner? Despite a downbeat outlook, the research team at Element said some signs can help investors spot a diamond in the rough.
“Projects that have already achieved sufficient decentralization such that the success or failure of the project isn’t dependent on the efforts of the founding team,” said Element, adding that projects that are aligned with companies that already turn a profit and projects that have consistent funding, often through mining rewards, would likely survive the continuing demise of crypto ventures.
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