How to Invest In Initial Coin Offerings (ICOs)

Pick any person on the street today and ask them what Bitcoin is. They will most probably have an idea, however slight. This certainly holds true for the developed world and most developing countries.

Cryptocurrency mania has recently taken the financial world by a storm. For instance, finance analysts have rigorously analyzed Bitcoin on the news in the past year especially. Bitcoin and other altcoins, and their specific details have elicited widespread interest.

Cryptocurrency Initial Coin Offering (ICOs) is a phrase that featured in a lot in the headlines. ICOs reportedly helped raise more than $1 billion in 2017 alone. Though the name stands out, many are yet to fully grasp how it works and the associated procedures it entails. For this reason, the following article will highlight the major features and procedures of an ICO.

What is an Initial Coin Offering (ICO)?

To start with, let’s define what an ICO is. A simple ICO definition according to Investopedia is:

‘An unregulated means by which funds are raised for a new cryptocurrency venture. An Initial Coin Offering (ICO) is used by startups to bypass the rigorous and regulated capital-raising process required by venture capitalists or banks.’

In effect, the goal of an ICO is to raise money that gives cryptocurrency its capital. Consequently, the ICO is in the form of a token sale of the particular cryptocurrency.

Pre-sale is another word associated with ICOs. The Pre-sale/ Pre-ICO happens before the official ICO campaign. This token sale event occurs prior to the main actual sale. The ICO is also referred to as the crowd-sale. The crowd-sale procedure is the feature of subsequent paragraphs.

By virtue of being a preceding step, its targets are relatively modest in contrast to the main sale. As a result; token prices are typically lower. Pre-sale therefore rewards the earliest investors best. The pre-Sale ends on the day the ICO goes live.

How the ICO works

The ICO process is one of the stages in the timeline of a coin. The development actually starts with the creation of the coin concept and getting a prominent community like GitHub to back the project. Besides, the developers decide the time an ICO takes and how tokens are allocated.

To delve deeper, let’s take a journey back in the timeline of a coin. The ICO whitepaper formulates a plan that contains details about the nature and goals of a project. It goes without saying that capital injects life into a burgeoning coin. The ICO stage is indeed crucial in the ICO schedule and largely influences the success of a coin.

The ICO calendar and details can be similarly inferred from the Whitepaper. It lays out the money to be raised and the amount of tokens that pioneers will retain. Other details, as mentioned earlier, are the currency accepted and the duration of the process.

Supporters of a project buy some of the distributed tokens with fiat or virtual currency. The tokens are similar to the shares of a company floated during the Initial Public Offering (IPO). Failure to meet the minimum threshold will result in reimbursement of funds and failure of the ICO. The project becomes actualized when the fundraising goals are met.

Similarity to Companies Initial Public Offering (IPO)

The underlying concept is markedly similar to that of initial public offerings (IPOs). This is because they offer a high level of volatility during a time when the market is assessing the appropriate price for the asset. The minor difference is that whilst IPO investors are motivated by prospective return, ICO supporters basically make donations. It has more of a crowd-funding model to it.

This is why you may come across the term ICO crowdsale when doing some reading on the process. The ICO crowd-sale therefore enables the public to acquire distributed tokens.

In a nutshell, the promise to early supporters is they will reap big if the coin appreciates drastically. The higher value can at times be up to thousands of times the initial price for certain investors.

One notable example is the smart contracts Ethereum project. Launched In 2014, the ICO raised $18 million in Bitcoins. In a short period of time, the price went to $14 with a market capitalization of over $1 billion. Its value has continued to appreciate and is now second only to Bitcoin.

In summary, the ICO effectively breathes life into a new cryptocurrency. Its importance cannot be overstated and any serious coin developing team must give it the highest regard. The outcome could propel the coin into the limelight and real world importance. For example, Ethereum was just an idea of a young techie, Vitalik Buterin, four years ago. Its success has been in no uncertain terms truly extraordinary.

Challenges facing ICOs

That said, it is not news that there are ICOs that are not well thought out and fail in due course. Besides, there are others that are flat out Ponzi schemes to con unsuspecting investors. This is made easier by the virtual nature of Cryptocurrency which means it can be a high risk endeavor. Investors have to carry out their due diligence in making proprietary choices. The absence of regulation is a double-edged sword in that funds lost to fraudulent schemes may never be recovered.

ICOs notably do not enjoy universal approval. One of the largest economies in the world, China, banned them in September 2017. The stated reason is the potential disruption to financial stability if their prevalence gained traction. The ban was sweeping in that completed offerings were penalized as well. Indeed, this sector needs consistent and established patterns to be trusted more. Governments that are paranoid about control like China definitely need better assurances.

Cryptocurrency will hopefully outgrow its speculative trends. The proportion of people staking funds in existing and new coins with hope of higher return has to correspond to those who actually utilize the coins as currency. Unfortunately, the volatility of the markets makes cryptocurrency undesirable and mysterious to many. The stability of this industry will go a long way in making it more mainstream instead of being a speculative commodity.

One more challenge I will highlight is with pre-sale investors. Some investors buy a large quantity of tokens at this point with the sole intention of dumping the tokens as soon as they become tradable. They make substantial profits but the value of the token takes a significant hit.

Some investment tips

Generally speaking, can absolute standard guideline for investment is non-existent. This is because there is a high degree of similarity to unregulated gambling. Prospective investors bank on the success of a coin without much in the form of insurance against losses.

That said some conventional tips have emerged from the few years of experience investors have had with ICOs .

A few of these are:

  1. Doing due diligence about a coin beforehand. Go through the ICO whitepaper keenly, assess the product if any and ask for all relevant information. The Whitepaper alone may be vague and general. Any detail including the people behind the project is part of the construct. If the information has gaps, the prudent step would be to keep away. The developing team’s profiles are crucial as it gives you an idea as to their motivations and background.
  2. Invest only what you can afford to lose. Much like gambling, it is unwise to hedge massive bets on an ICO no matter the promise. As a matter of fact, this insurance policy that works either way. However, it should not be taken as a blanket policy; if the coin checks out, there is an opening for sizeable investments.
  3. Invest in what you understand. That is pretty simple and can go a long way in self-regulation. Products should be straightforward and have real world value. This is because the promise of a good product return hinges on adoption of the solution.

As a final rule, if something sounds too good to be true, it most likely isn’t. The classic marker of a Ponzi scheme is the promise of absurd returns. Most fraudulent schemes rely on the greed people have for quick money. The projections have to realistic and well- thought out for the platform to make sense.

Participating in an ICO

The first step would obviously be registration on the project website. This has become standard practice and absence of which is a potential red flag. A website that does not place a high priority on the verification of its users is only interested in their money. Additionally, you should also be able to read on the website’s info without being compelled to register.

To participate in most ICOs, you need to first own digital currencies such as Bitcoin or Ether. They can be bought on cryptocurrency exchanges. Ether has actually become the coin of choice for most ICOs. The coin is deposited into your cryptocurrency wallet. To participate in the ICO, you send the Ether for example to acquire some tokens of the new coin.

Tokens are priced as stated in the whitepaper and you can buy as much as the Ether you have permits. Additionally, you can buy tokens for lower prices during the Pre-sale period. The website sends the tokens to your wallet of choice. Normally, there is a minimum investment for the ICO. ICOs have the primary goal of raising money and all the necessary information should be readily accessible on the website.

Final thoughts

Assessing the ceiling of any new project is a tall order. However, the gathering details from the initial coin offering can provide a general indicator as to its future prospects. The regulation of ICOs seems like a necessity at this point to mitigate the prevalence of fraud. Nonetheless, this would be an impediment to the decentralized ideals of cryptocurrency.

It is understandable why some countries crack down on ICOs. It is a quick way of generating capital without the drawbacks of tight regulations in the financial sector. Regardless, these measures should not be overwhelming as to shut out the ICOs altogether.

It takes a concerted effort from all stakeholders to ensure that cryptocurrency is a self-sustaining industry. Many have unreliably warned of a bubble but I wouldn’t go in that direction. This is because upon understanding the nature and ideals of digital currency, one gets to appreciate its positive disruptive potential. ICOs represent a gateway into the sector. In my opinion, it should be well-guarded to ensure only positive elements thrive in this community.

In conclusion, cryptocurrency offers a glimpse into the future. This sector, upon stabilization and maturity, should continually progress into a self-sustaining ecosystem. ICOs are definitely going to be a consistent feature in the future. The financial world should get strapped for this journey.

 

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