As the price of bitcoin recovers lost ground, experts have warned that the cryptocurrency market could be heading for a bubble due to the number of Initial Coin Offerings (ICO) that have been held recently.
About $1.2 billion has been raised through ICOs so far, six times more than the sum raised last year. Most of the coins being launched duplicate the function of existing currencies and have led to a dumping of large volumes of ethereum which is the coin of choice for subscribing to the IPOs.
Ethereum is the 2nd most traded cryptocurrency after bitcoin.
What is an ICO
ICO stands for Initial Coin Offering. It is a means whereby companies raise capital either for a new coin or a project. To participate, individuals pay a certain amount of money either as bitcoin or ethereum. Participating in an ICO, does not grant ownership of the company behind the project. ICOs have witnessed a huge surge recent due to the demand but investors seeking a high rate of return. New coins often trade very highly in their first few weeks of opening, some as high as 1000% in a few days . Companies and businesses have also raised money en masse through ICOs because they do not come under the scrutiny of regulators in the finance industry.
How ICOs are causing a bubble
Investors lured by huge returns flock into the ICOs. Companies seeing the rush into previous ICOs come up with even more of them. The multitude of ICOs then even outs the returns. Disappointed investors sell down the coins once they start trading. Companies that raised money often pay back money to investors using ethereum, leading to a further crash in prices.
What should people do
Exercise caution before investing in an ICO. Does the company have a valid product offering or does it copy an existing product. Are the management experienced in the cryptocurrency or technology sectors or are they newbies. Take time to read the offer document or white paper before investing. Read reviews from reputable cryptocurrency websites.