What are ICOs?
An ICO stands for Initial Coin Offering and refers to the initial placement of tokens on the Blockchain. You can view it as a specific crowdfunding model where the participants finance the development of a project in return for some future benefits. ICOs are often compared to IPOs or Initial Public Offerings. But unlike the latter, in IPOs, participants do not receive a stake in the company and hence cannot influence internal management decisions.
It’s widely believed that “Mastercoin” was the first ICO to be held in June 2013, collecting more than 5000 Bitcoins. However, perhaps the most powerful ICO was that of Ethereum in 2014. The token was sold at a rate of $0.30 per token. Their value on the exchange increased up to $13 at one point and further increased to $390 in June 2017.
There is an emergence of ICOs presently in unprecedented numbers. The new projects which look for investors crop up on a daily basis. It stands to reason that the more projects created, the less of them will be successful. On top of that, a lot of ICOs are created simply to scam people. The occurrence of such projects will only grow as people become aware that it’s a way to make some easy money. Yet there are many projects that you, an investor can miss out on. Hence the best way to look at ICOs for investing is to examine them and get to know what they are all about.
Differentiating between ICOs and IPOs
An IPO is a legitimate operation through which a company with an existing and maturing business structure can attract funding. Raising funds through selling shares is the cheapest way to do this. Launching an IPO process, however, is expensive. For a company to enter exchanges, it must meet some specific requirements, including the volume of capitalization and regular audits. In addition, the company has to attract underwriters to sell the shares of the company. There’s also the additional responsibility of attracting money and investors after which it will start the process of trading its shares on a stock exchange. That’s a considerably long and costly process.
The creators of ICO campaigns on the other hand have to declare their limited number of coins, which also produces demand. The process is shorter comparatively. Both IPOs and ICOs are risky ways to make money but can generate profits as well. There is a large degree of speculation in the ICO field, however, where people participate just to make a quick buck. This is why coin prices can go up and come crashing down within a very short space of time.
Such speculation is rather absent in the IPO space because of the existence of a lock-up period. People who bought the shares before the IPO cannot sell them until three months later. This is not the case with ICOs, where coins can be bought even in the pre-ICO stage.
Despite such differences, there are many reasons why people take the risk of investing in IPOs. Some people pump money into these projects simply as a way to support them. There are others who quickly buy and sell tokens to make a quick profit. There is a third group of people who have read about the project somewhere on the net and want to duplicate the success others have achieved.
Distinguishing between promising ICOs and Pyramid schemes
Almost all the companies that launch ICOs are startups that do not have the so-called minimum viable product or MVP. Most of them start with just an idea and concept. While that’s not always a bad thing, but there are many startups that show the signs of pyramid schemes. These schemes normally promise their investors unreal degrees of profits. Some are enticed into it.
A typical pyramid scheme begins like this. Firstly, the companies run a pre-ICO which is the token sale event before the official ICO campaign goes live. This event is typically held to raise funds for marketing, which can include a PR campaign during the ICO. As a result, there is a huge amount of speculative money in such ICOs. The surge created by every new investor joining seals the fate of these ICOs. Eventually, people sell these tokens, resulting in pressure on the token value.
This is not to say that there aren’t good projects out there, especially in the Blockchain space. But on record, only two to three percent of all ICOs eventually become successful.
Characteristics of a good ICO
As an investor, to profit from ICOs, you must first understand why you are investing in it. Thus the reasons for your transaction entry should be equal to the reason for the exit. If your participation solely depends on the ICO being a future product, it’s not such a smart decision. First, you should let the company enter the market and start trading. If you still believe in its product, go ahead.
The characteristics of a good ICO can be considered as follows:
- It provides a clear understanding of project tasks and objectives.
- The identities of the chief executives and developers are known and they are active on their social media accounts for a long period. In short, they are legitimate personalities.
- Community leaders must provide support4
- The team should deliver speeches and participate in cryptocurrency events.
- It should ensure the distribution of money after the ICO period.
- It should provide an open-source code on GitHub
- It should provide detailed information about different aspects of the project on social media such as Telegram, Twitter, YouTube, Bitcointalk, Reddit, just to name a few.
When you have already chosen and short-listed an ICO and decided to invest in it, you should constantly monitor the information the project releases. One of the best ways to do this is to join their chat and follow the project updates on Twitter, which has increasingly been an active space for cryptocurrency promotion. Always be aware of the community talking about new scams being found out and do some research yourself before making a final decision.