ICOs are the New IPOs – What’s the Big Deal About Initial Coin Offerings?
Move aside IPOs, ICOs are making waves. Gone are days when startups had to woo venture capitalists for mere peanuts and provide extensive business plans and MVPs. Now even teams of anonymous creators can raise millions in minutes with initial coin offerings.
What are ICOs?
ICOs or initial coin offerings are basically a new way to raise funds for projects which utilize blockchain technology, and given how blockchain technology lends itself to multiple use-cases, almost every startup today can find a place for it in its business model.
Be it an Airbnb competitor or a content distribution network, even hardware manufacturers competing with the likes of Apple (Sirin Labs) have managed to integrate blockchain technology at the core of their businesses.
And when you involve blockchain, or DLT, you have the ability to generate tokens, particularly on the Ethereum platform. These tokens are then distributed to participants of the ICO, in exchange for other crypto assets, such as Bitcoin or Eth – ultimately raising funds for the project’s development.
Participants in an ICO essentially trade their crypto assets for these new tokens in hopes that when the project takes off, the native tokens will appreciate in price, netting them a profit on their initial exchange.
What is the big deal about ICOs?
The big deal is the potential for profit. Some ICOs which have taken off, including Ethereum, and NEO (back then known as Antshares), have netted massive gains, where initial investors, who paid mere cents for tokens are now sitting on stacks worth hundreds of thousands of dollars.
However, given all this hype, naturally there are a lot of scams in the market too, and since the whole space is unregulated, bad actors can easily start up a project, raise funds and disappear.
That being said, governments around the world have been cracking down hard on ICOs, with China banning them outright and the U.S. SEC also levying restrictions, prompting ICOs to differentiate their token sales from sales of securities.
The key hence, is finding projects with actual utility and the potential to succeed in the long term. Additionally, you, as a token buyer, need to make sure what you’re buying is a utility token with actual use within the ecosystem and not just an arbitrary token with face-value.
How can you identify good ICOs?
It all starts with the white paper – which is supposed to present a project summary and a detailed overview of how everything will work. Savvy investors will always refer to white papers and ignore hype. There can be several red flags, such as a white paper which is vague and loaded with buzz words, or a white paper which fails to back theory with proof of concept and research.
Then comes the team – no matter how good an idea, without a team that is capable of executing it, it is bound to fail. What you need to realize is that individuals who have not been able to achieve much so far, are not going to suddenly turn into geniuses just because they get your money.
For a lot of people ICOs are about raising funds – the project comes later – and you, as an investor need to make sure your money is well spent.
After that, you need to look at the finer details, such as the total supply and distribution of tokens. If a team is keeping half the tokens for themselves, it may be a red flag because controlling half the supply gives them a lot of influence on the future price. Some projects do have vesting periods, where the team’s assets are locked up – but all this is part of the fine print, and you need to read that.
Finally, you need to make sure the ICO you pick has social traction and activity. Most diligent ICOs have active social media presence, where they cater to questions and help the community understand the project and its particulars. An ICO with zero, or negligible social media activity, should be viewed with caution.
In summary, since your crypto assets such as Ethereum and Bitcoin have solid value, every time you invest them in an ICO, you take a major risk. While the chances of a high return are undoubtedly there, major losses are not unlikely either. As with all things crypto, you should evaluate the risks and only invest as much as you’re willing to lose.
