The cryptocurrency market currently has over 10,300 coins in existence according to coinmarketcap. These coins were birthed through ICOs (Initial Coin Offerings).
An ICO is very similar to an IPO (Initial Public Offering), which is the term used in the stock market for the listing of new stocks on the exchange. An ICO is a fundraising method used primarily by start-ups wishing to offer products and services which are usually related to cryptocurrencies and blockchain technology. ICOs are similar to IPOs but the difference is that the utility is for a software-based service or product.
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How ICOs Work
An ICO works like an IPO, as earlier stated. A start-up cryptocurrency-based company decides it wants to raise money through ICO. After this decision, the company must create a whitepaper. The whitepaper is what you would term the prospectus of the cryptocurrency world. It outlines what the project is about, the need the project wants to fulfil upon completion, how much money is needed, how many of the virtual tokens the founders will keep, what type of money will be accepted, and how long the ICO campaign will run.
After creating the whitepaper, the start-up will then run an ICO campaign to promote the coin and the company. During the campaign, the company will launch advertisements at targeted communities about the project in a bid to create a large following of fans, supporters, and enthusiasts for the project. These fans will now be encouraged to buy some of the project’s tokens with fiat or other established digital currencies. These coins are referred to the buyers as tokens and are similar to shares of a company sold to investors during an IPO.
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At this stage, If the money raised does not meet the minimum funds required by the firm, the money may be returned to the fans that were encouraged to buy the tokens. The ICO can be deemed unsuccessful at this point. However, If the funding requirements are met within the specified timeframe, the money raised will be used to pursue the goals of the project.
It is important to note that ICOs aren’t regulated. This means that it is the responsibility of an investor to do proper due diligence on an ICO before investing. This is why this article is important.
The cryptocurrency market is full of FUD (Fear Uncertainty and Doubt) and the risk swings both ways. Many cryptocurrency believers are optimistic about the possibility of digital currencies going mainstream. On the other hand, some investors have lost fortunes on fraudulent schemes and ill-conceived ideas and ICO’s are prime examples of how investors get scammed these days in the cryptocurrency market.
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As an investor assessing an untested project, it is essential to know what it takes for an ICO to be successful. While it may be hard to spot the next Ethereum or Cardano, it is much easier to recognize the warning signs of a potential scam. “Investors should always do due diligence before supporting a new company.” This is one of the oldest sayings in the financial world but people still don’t obey. For novice investors, it’s easy to grow FOMO (Fear Of Missing Out) when it comes to ICOs especially when several ICOs have led other individuals to breath-taking wealth.
Here are a few things to consider before investing in an ICO.
The team
The first and most important thing to look out for is the team. As an investor, you know very little about the project or the company. So, the very first thing you should look out for is the team and people behind a particular ICO project. The strength and quality of the team will tell a lot about the project itself. Whether the team members have any experience in the field of cryptocurrency or any other related field in that matter.
A good project usually has experienced founders who are more likely to avoid the pitfalls facing a new business. While most companies prominently list their team and partners, it’s important to verify their claims from other sources. Some projects have been known to overstate the qualifications of their team and even construct non-existent partnerships that don’t exist.
Are the company founders and stakeholders capable enough to run the project successfully and deliver the said returns? Can they be trusted? Check their LinkedIn and other social profiles for as many details as you can collect about each of the ICO team members.
The Whitepaper
As an investor, what you are looking for here is a well-documented and detailed white paper. The ICO white paper is the most solid thing that you can use to check the validity of the project. It will tell you everything there is to know about the ICO project, including why it is worthy of your investment, its future applications, commercial uses, revenue mechanism, coin trading at exchanges, etc. Whitepapers also outline the aims and strategies of that project in detail. Some projects might have amazing ideas but lack a practical approach for achieving those goals while others may lack crucial details that leave you wondering whether the project is truly feasible.
Prospective investors must necessarily read the white paper of an ICO company to understand the project’s feasibility and determine whether or not it has any future.
Tokenomics
Tokenomics involves understanding the supply and demand characteristics of cryptocurrency. ICOs allow investors to fund their projects by selling tokens to grant access to a network or service. Investors buy the tokens or make money by hoping that they will gain value after a successful network launch.
To understand a token’s potential value, you need to understand how and why the token will be used. If there is a clear reason for people to own and use the token, the price will likely stabilize after a successful launch. Over time, the more people that use the token, the more there is a supply shock and that ultimately pushes the price up. If the main use for a token is market speculation, it may be susceptible to long-term volatility which means that there is no use case and thus no real reason to hold the coin. This will lead to low demand and ultimately, price crashes.
Community
A good ICO company will definitely try to promote its new cryptocurrency on famous cryptocurrency forums. There are many forums such as Bitcointalk.org and cryptocurrencytalk.com. Make sure to check out these places and various other blockchain communities to see what people are saying about the new coin or if they are talking about it at all. You can also find there, some professional help in selecting the best ICO to invest in right now. As a member of a crypto-token community, you can also start your threads asking for information and advice about investing in a particular token. Also, take a look at what media sites and press releases are saying about that particular token. If it’s not anything good, do not invest.
It’s also important to know how tokens are distributed. Much like an initial public offering, a company holding an ICO should clearly state the maximum coin supply, as well as the number of tokens allocated to founders, early investors, partners, and the company itself. In some cases, there may also be lock-up agreements that prevent the tokens from being sold immediately after the ICO.
With these points, an investor will be able to decipher whether or not an ICO is worth investing in.