Right now, as you are reading this, someone is launching a new initial token sales to raise funds for their startup. An initial coin offering or ICO is a simple way to attract investment while maintaining control over your project. Also known as token generating events, ICOs using Ethereum ERC20 tokens supported the launch of many disruptive businesses while also bringing attractive returns to early supporters of projects involved.
History of ICOs
The first ever ICO was held in 2013 by Mastercoin. The event took about a month to complete and it raised over half million dollars. Since then there was a massive growth of popularity of ICOs with a new event being launched every day. Not all ICOs were successful, with only 54 events in 2016 reaching their funding goals and 92 successful events in 2017 raising over $1.3 billion. Compared to traditional venture capital investing in fintech projects ICOs attracted three times more investment to the blockchain industry.
Considering the fact that there are 20-50 ICOs launched at any time, investment opportunities are ample. The average small ICO aims to raise tens millions of dollars, and the highest ICO took 500 million dollars. The market capitalisation — the market value of investments and any appreciation or depreciation of a cryptocurrency that bought into them — measures at half a trillion dollars in the first half of 2018. Come to think, ICOs are a very young industry, so this growth rate is fascinating.
Benefits of ICOs
One of the most significant benefits of initial coin offerings is that they offer a low-cost access to investment in new technologies for regular people. You get a certain amount of coins that you can sell at a later date with a fixed profit, or you can wait until the business matures and becomes profitable or close to profitable.
To invest in a traditional IPO and buy shares in a company you need a help of a professional or institutional investor who also claims a fee. IPOs are regulated by stringent securities laws, while ICOs are less strictly regulated.
Companies also benefit from the low risk: instead of a share of a company you sell tokens which provide no ownership rights or control. They use the money raised to quickly bring the product or a solution to the market. On many occasions, the company would completely overhaul its offering and make significant changes to the product initially marketed.
Risks of ICOs
The main risk is associated with tokens since they are not deemed as secure as shares by most jurisdictions. Tokens do not give you any legal rights of the company or its assets. In the best case scenario, you have a contract that allows you to recover your funds if the company is unsuccessful.
When considering a project for investment, there are three levels of project risks that are similar to those associated with regular startups.
1. Low level of risk
The legitimate idea of the ICO with a team of people behind it that can actually make it happen. This is the least risky route, although of course, сoperational and market risks are inevitable. All you have to do is to accept these risks.
2. Medium risk level
The company has no clue how the market works but they believe they have a great idea. The managers are not fully aware of the risks and challenges that the project will meet ahead. This offering has high risk of falling apart because in the addition to usual operational, market and business risks you add a risk of bad management. You need to perform your due diligence to fully understand the viability of the project’s idea, the strengths and weaknesses of the team behind the project as well as proposed business models.
3. High level of risk
The highest risk for your investment is an ICO where the project managers only want the free cash and plan to dissipate immediately after the ICO ends. There are no signs of the development of a project. Their promise sounds too good. This is the ICO you should run away from. This is more than a risk — this is a losing bet of your money from the beginning.
To begin learning how to tell the bad sheep start with looking at ten ICOs published on popular ICO marketing platforms. If you can tell three ICOs that will fail to raise the money they aim for at the first attempt, you are in a good shape.
Are ICOs Legal?
In most jurisdictions, token sales are legal although not all countries allow their citizens to join them. To avoid being associated with stock trading companies and fall under a different law category, token sales are marketed as “early access,” “contribution” and “donation” from early supporters.
As there are no laws regulating the relationship between investors and token buyers, the ICO economy attracts hundreds of fraudsters who are preying on beginners in investing who want to profit on the increasing price of the tokens. Without substantial legal framework, cryptocurrency industry may be less attractive for large capital and miss potential in development.
What Is A Good ICO Investment?
There are several ways you can examine an investment in an ICO. The first is the appreciation in value over time that you expect it to make. Most ICOs will give you a discount when you buy their tokens early, ideally on a pre-sale. In this case, you clearly know the upside to expectations. The second way is to examine the business and discount the value of their projections in a way that reflects where your investment would be in a specific time period. No one can really tell what kind of investment would be good for you. All investors have their own ambitions.