Satoshi Nakamoto created Bitcoin in 2009. Since then, the crypto market has grown exponentially, becoming an industry worth hundreds of billions of dollars. However, the top 100 cryptocurrencies by market cap have changed continuously over these 15 years, and many tokens have declined, but why most crypto projects fail? Well, it's due to various reasons, including a lack of real useful utilities, an unsustainable business model, technical issues and obstacles, a lack of marketing budget, scalability issues and more. This causes losses for investors but also stimulates healthy competition to build the most effective blockchain and crypto projects, aiming to solve the Blockchain Trilemma.
Failures in Crypto: Why Most Crypto Projects Fail?
In this PlasBit analysis, we analyzed all the common reasons that cause crypto and token projects' failures. It has been interesting discovering that the main reason is the lack of real utilities: most crypto projects don't solve a real issue by providing a valuable and competitive solution through useful products or services, but they just want to raise funds through ICOs and other funding methods. On the contrary, the most resilient and profitable crypto projects have already developed solid and useful products or services before launching the token. However, every cloud has a silver lining, for 2 reasons:
- Failures of crypto projects boost the growth of the ecosystem: By hard competing in the crypto industry, the most high-tech IT companies are increasing the technology improvement of blockchain networks. It allows the ecosystem to continue improving cryptocurrencies with more secure, fast, and scalable infrastructures.
- Only the best cryptocurrencies will remain: Progressively and periodically, cryptocurrencies in the top 100 market cap rotate and are replaced. Consequently, only the best cryptocurrencies will prevail, ensuring a safer ecosystem.
But let's analyze crypto failures in more detail.
Lack of Real Utility
This is the main point: Most of the crypto projects (NFTs have demonstrated that) don't solve real problems and don't provide valuable and useful solutions. To be a potential good investment, a project should be able to generate profits. And profits can be generated only by providing value to solve real problems in which people need help, whether it is a service or a product.
NFTs Case Study
During the NFT boom in 2021, a lot of new and experienced crypto enthusiasts have purchased JPEG images for millions of dollars. Personally, I recognize the potential of Non-Fungible Tokens, and I appreciate the Culture behind the Bored Ape Yacht Club, Crypto Punks, and more. But right now, only a few NFT projects still have some cultural appeal because they basically don't have concrete utilities to justify their high value. Marketing and new trends can fuel hype, but in the long term, only projects with real utilities can survive, prosper, and grow. That's the truth. However, the cultural appeal of the first NFT collections is valuable, but only for a few selected projects, the first ones.
Difference Between Hype and Real Value
As we just mentioned, the main difference between successful and unsuccessful crypto projects relies on the value they provide. Why most crypto projects fail? Mmm.. do they provide real value in solving high-demanded problems? In most cases, they do not. One of the most common mistakes of crypto project founders is to believe that "the right vision" and "revolutionary ideas" are enough to create a useful and valuable project. They are not enough because, with good marketing, you can raise a substantial amount of money with token sales, but if you don't have the right products and utilities, the intrinsic value is not enough. The hype of crypto token sales can last only a few days, weeks, or maybe months. However, without providing real value and creating a sustainable business that generates profits, crypto projects tend to fail.
Refined Marketing Tactics
ICOs, tokens, and NFT public sales can be very profitable for the project behind it. In fact, most of the project budget is commonly spent on marketing efforts to engage as many people as possible and raise the maximum quantity of funds. It's conceptual wrong: Why should you raise money with an unsecured token offering when you haven't any useful valuable service or product? Anyway, the smartest, most dynamic, creative, and most efficient marketing agencies are commonly hired by ambitious crypto projects' teams. By creating a good brand identity and project narrative and investing in growth hacking tactics, marketing agencies scale crypto projects, gaining good results through token sales and raising huge amounts of money in the last years. However, the business can be successful with marketing only when there is also a valuable and profitable activity behind it. Otherwise, it can't work in the long term. One common scam in marketing and crypto, in fact, is based on network marketing, in which the value of the crypto project relies only on bringing new people into the project, while there is not a valuable service or product the project provides. As you can imagine, this situation often degenerates into Ponzi crypto scams, as in the famous case of Onecoin or, most recently, Ultron.
Difficult Governance in Web3 Businesses and DAOs
A lot of crypto projects that raise funds through token sales promise token investors governance rights in various ways, such as voting, earning dividends, and more. However, in all these projects, there is an evident conflict of interests between the teams and token investors. On one side, there is the Team with a registered business (in legit cases) that wants to make the interests of their own company and families. On the other hand, there are token investors who are often new, inexperienced, and impatient investors who want to make quick profits and often do not know how an investment works. Well, as you can imagine, this is not a peaceful and prosperous situation to make a new business work and become profitable. In most cases, businesses and ideas, without valuable services or products, funded with token sales, fail. At PlasBit, we pride ourselves on having built our platform without involving third parties or raising funds with unlegit token sales. We've built our platform through in-house proprietary tech solutions, with our money and efforts, and it makes us independent and able to guarantee justice and fairness in our ecosystem.
DAOs: Do they really work?
The concept of DAOs is cool; the ideas behind them are great, based on transparency, justice, and equality in business governance rights. However, do DAOs really work? Even if DAO's concept has great revolutionary potential, right now, most DAOs fail due to governance issues, lack of real utilities and profitable business. As you can imagine, making key decisions in a fully decentralized company is not easy since all the participants likely have different ambitions, goals, timeframes, and opinions. On the contrary, centralized “traditional” companies can make decisions quicker, adapt to market trends, move funds, and make the workflow faster. So, do DAOs work? The concept might work, but right now, most of them lack real utilities, functional governance, and sustainable businesses behind them. It's still too early for DAOs. We're not ready for a complete decentralization in businesses.
Technical Challenges
Smart contracts and blockchain technology could be revolutionary, but if you are a builder, you must know what you're doing. It's not easy (nor safe) to code a smart contract without the technical skills required, it's a job for blockchain-specialized developers. A small issue in the code could cause the loss of crypto assets and the failure of the project. This is the first big barrier in worldwide adoption of blockchain tech solutions. But it's not the only one.
As you might know, blockchain networks must try to solve the Blockchain Trilemma, which implies that it's very difficult to reach optimal results simultaneously in scalability, security, and decentralization. Let's analyze these factors better.
Scalability
Scalability refers to the capacity of the blockchain to handle an exponential amount of transactions without incurring in slowdowns or blockages. If you're building a new blockchain, you should find a balance between scalability, security, and decentralization to allow your network to grow without problems. The Blockchain Trilemma is the most difficult problem for blockchain developers to solve.
Security
Security is another factor in the Blockchain Trilemma and a critical component of each crypto project. As you might know, blockchain is an innovative technology because the transactions registered are irreversible, immutable, and shared simultaneously on a shared distributed ledger around multiple independent and decentralized nodes. However, it's possible only due to their consensus protocols and security measures. Many projects fail due to bugs or security issues in their smart contracts and cyber security malpractices.
Decentralization
Blockchain brings value because it is a safer distributed digital ledger compared to central banks. It's also possible, thanks to the decentralization of blockchain nodes, to avoid a single critical point of failure. In a central financial ecosystem, in fact, if a small group of powerful people internal to the organization decides to sabotage the system, they could probably succeed in their mission. On the contrary, on blockchain networks, you need the majority of nodes to sabotage the network, and it is currently impossible due to computational and economic needs. Additionally, if you basically control most of the network, you wouldn’t have an interest in sabotaging the blockchain. On the contrary, you should aim to make it as safe as possible since you’ve direct financial interests in making it work securely.
Energy Consumption and Environmental Impact
Another technical factor to keep in mind is the environmental impact. The Bitcoin blockchain has been criticized a lot for the energy consumption of the Proof of Work, its consensus protocol that allows the security of the network. However, efforts have been made, and Bitcoin miners are starting to use renewable energy to make their crypto-mining factories work. Moreover, the Lightning Network is a scalable solution that is gaining traction and could partially solve environmental issues. In blockchain protocols that rely on the Proof of Stake system, on the contrary, the environmental impact is not relevant since the protocol is based on staked assed instead of computational power.
High Costs
In YouTube videos, you can often hear that creating a crypto token is simple, but that's only a partial truth. You can create a token with just a few cents, and that's true. But it doesn't mean that you created a crypto project. Just keep in mind that if you create a cryptocurrency, it should be purchased and sold on common platforms (CEXs and DEXs). Well, how do tokens get listed on exchanges? In rare cases, the most trending tokens are listed due to the high demand of users. In most cases, however, the crypto project must pay substantial fees that could arrive at up to 1 million. However, the costs are exponentially higher if you're building a blockchain and not a "simple" token. Consider also the expenses to create the website, the contents, the community, and, most importantly, the value of your project. If you don't have a substantial amount of money to invest in growing the ecosystem, your crypto project will fail.
Regulatory and Legal Challenges
There are various examples of crypto projects struggling with regulations and legal challenges, such as the SEC vs XRP lawsuit. There is no unique regulation for crypto assets, but they are different based on the country. Some countries, such as El Salvador, Switzerland, Dubai, and Singapore, are more crypto-friendly, with clear and incentivizing regulations. Some other countries, however, are against cryptocurrencies, such as Qatar, Morocco, and China, and have tried to ban Bitcoin and cryptocurrencies. Rules and compliance procedures are quickly changing and evolving, and staying ahead is not easy for a crypto project. Sometimes, specific regulations can cause some crypto companies to close their activity, as happened in the crypto mining ban in China.
Scams and Rug Pulls
Not all crypto projects have good intentions; some of them fail because they are basically scams. Rug pull scams occur when a crypto project seems legitimate and attracts investors to raise money, usually through crypto token sales or NFT minting. Once they raise funds, they disappear with the loot, leaving an empty fake project and disillusioned investors. When the scam is perpetuated over time, even months or years, it's called slow rug pull since the manipulation of the team is perpetuated for a long time, making the scam "slow" to be recognized. As you might understand, some crypto projects fail simply because they are scams: Normal and slow rug-pull scams, Ponzi scams, Pump-and-dump projects, and more. Watch out for crypto scams and learn more about how to prevent them in our PlasBit research section.
Unsustainable Business Models
Before, we mentioned crypto projects that fail due to the lack of utilities and value provided. Now, we analyze projects that fail for similar and linked reasons. In fact, some crypto projects might actually provide some real valuable utilities, such as blockchain projects focused on supply chain, integration of IoT, oracles, smart contracts, and more. But sometimes, even if their solutions work and are valuable, their business model is unsustainable, and consequently, crypto projects fail. For example, if your infrastructure has higher costs than the price that people are willing to pay for your blockchain service/product, your crypto project will likely fail, and that's only an example. Before creating the token for your crypto project, remember that the rules for surviving and prospering in the long term are the same as those for traditional businesses: Provide value and be able to generate a profit; otherwise, your crypto project will fail.
Dependence on Investors and Market Volatility
Other critical factors that sometimes determine the failure of crypto projects are the dependence of third-party investors and infrastructures, and the market volatility. Some crypto projects have failed just because they were launched at the wrong time, during the beginning of a bear market, for example. Relying on raising funds through token offerings, crypto projects entrust part of the success of their business to the investors, making the project dependent on third parties. As you can imagine, crypto investors are often irrational and looking for quick gains. If your project takes time to become profitable and provide value to investors, they will likely sell the tokens and forget the project. Raising funds for development in crypto will expose you to market volatility and could cause your project to fail based on third-party choices or factors.
Too Many Similar Cryptocurrencies
Why is Bitcoin often called the king of cryptocurrencies? Because it is the first cryptocurrency created, and that's one of its main competitive advantages. However, since the creation of Bitcoin in 2009, people have created more than 10,000 cryptocurrencies, saturating the market and not providing actual value or competitive advantages. An infinite list of cryptocurrencies with no real utilities and no big differences between each other. As you can imagine, most of the cryptocurrencies born during these years have failed, and the top 100 cryptocurrencies by market cap change continuously. In my opinion, only a few cryptocurrencies will survive for a long time; only the cryptocurrencies that provide real value have use cases, institutional support, and transparent and secure protocols. Be aware that crypto projects promising quick profits or unreachable goals will likely fail. Before investing in a crypto project, investigate the team, analyze the token economy, check the community support, and, in a simple word, do DYOR.
Lack of Adoption and Community
Even if token sales are often low-regulated and can bring numerous challenges, they also bring positive innovation. Among various innovations, the main one is the inclusion of the community in crypto projects and businesses. With the blockchain, in fact, organizations can organize votes based on token holding and users’ involvement, doing it through smart contracts and DAOs. The most important and profitable crypto projects have solid and large communities that support them, and projects benefit from trusted and effective word-of-mouth that allows them to grow and scale at a low cost. However, it's not simple to create, grow, and manage a community of heterogeneous people who come from different parts of the world with different cultures, goals, budgets, and expectations. Some crypto projects fail due to a lack of community and adoption, consequently not reaching the aimed audience and results. If you're building a crypto project, consider community support one of your priorities.
Why Most Crypto Projects Fail? A Final Recap
At PlasBit, we believe that most of the token sales are too risky and cannot help projects in the long term. In fact, you would become dependent on third parties and put the funds of your community at risk. Additionally, your company will depend on market movements and economic cycles. Consequently, we pride ourselves on having built our platform with our own funds without relying on third-party investors or token sales. Our priority is to provide the best all-in-one crypto platform to help users reach the full sovereignty of their assets and to educate them to reach their financial freedom. We don't believe in the corruption of the traditional fiat currency system, and we think that cryptocurrencies, and, in particular, Bitcoin, can give people financial freedom for the first time in human history. This is our mission: empowering people with all the tools and information they need to be financially free.
So, if you're still wondering why most crypto projects fail, the answer is quite simple. Crypto projects fail due to a lack of utilities, community support, and competitive advantages, high costs, unsustainable business models, regulatory challenges, and technical and security issues. Only a few projects will likely survive in the long term, but it could be positive, because it makes the market dynamic, innovating faster. In conclusion, PlasBit wants to remind you of the risks of trading and investing in cryptocurrencies. Before making any investment, learn, research, question, and be sure to understand which crypto project you're investing in. Always do DYOR to recognize the common red flags and avoid being trapped in an unsafe and risky crypto project. However, mistakes are normal, especially in cryptocurrencies. If you make some mistakes, don't worry, and consider them part of your personal learning path; you'll enrich your knowledge and experience, preventing you from making bigger mistakes the next time. We hope you’ve understood why most crypto projects fail and, as always, we're here to help you on your Web3 journey with more educational content and useful tools.
