Initial Coin Offerings (ICOs) can be complicated for newcomers and even more experienced cryptocurrency investors. With the continued rise of ICOs as fundraising events for blockchain projects and their respective cryptocurrencies, it’s important to have a solid understanding of how the process usually works as well as some of the possible benefits and risks that are relevant to you as a potential investor.
In this guide, we’ll provide detailed explanations to some of the most common questions that people generally have when first starting to explore the possibility of participating in cryptocurrency ICOs.
Note: This article does not aim to serve as legal or financial advice nor does it serve as a replacement to advise given from a certified financial planner.
Regardless if you’re investing in cryptocurrencies, stocks, or any other market, it’s important to ask yourself the motivation behind any investment. While the obvious answer is “to make money”, there is a lot more in-depth thinking that goes into the decision-making process for choosing specific investments.
In 2018, the ICO market has many risks. Cryptocurrency prices tend to be very volatile when compared to prices in blue chip stocks or commodities. This is due to the fact that most cryptocurrencies in existence aren’t directly tied to tangible assets.
If you’re objective is to invest money in a random ICO in hopes that the overall market will eventually bring all cryptocurrency prices up, there is plenty of evidence to show that this is not a good choice. For example, nearly half of all ICOs in 2017 failed. So what are some of the foundational reasons to invest in a given ICO? There are generally two primary motivational factors for ICO investors to first consider.
First, a project’s vision should be to either solve a market problem or fundamentally change the way an existing market works. If a project has a scope that is too narrow or too wide, It might not be a good idea to not to invest. It’s important to note that a sound project vision certainly doesn’t guarantee that a given cryptocurrency will succeed.
It’s also essential to realise that you don’t necessarily need to have a specific interest in a cryptocurrency’s target market to become an ICO participant. For example, you might not be an avid gamer, but you could see the potential of a cryptocurrency that aims to create a decentralised platform for video games. Likewise, it’s essential not to blindly think a project will be successful just because you have an interest in a given cryptocurrency’s specific niche. Basically, you should generally make judgements based on facts and unbiased reviews rather than just going off of “hype”.
Second, a project’s technological innovation can also be a motivation to invest. Even though blockchain technology itself is innovative, this doesn’t necessarily mean that all blockchain projects are innovative. For example, a blockchain project might just be a cookie-cutter of an existing project, meaning that it doesn’t have any real advantages to offer to the market from a technology point of view. Investors should expect that ICOs will offer more innovation upfront over time. For example, we are seeing a growing number of projects offering new and promising technologies like off-chain protocols, sidechain protocols, sharding, and more.
One of the most difficult factors can be finding a project that brings technical concepts from ideation to real-world implementation. As an investor, it’s difficult to predict whether or not a project will be able to execute its goals. As we have seen in failed projects such as The DAO, sometimes innovative technical concepts can lead to large ICO participation but don’t always lead to sustained success of blockchain projects and their cryptocurrencies.
In the current climate of ICOs, many projects have various restrictions on participation. Restrictions are typically determined by the project team due to established regulations (i.e. China’s outright ban of all ICOs) or simply because the project team wants to avoid nations where there could be a legal battles sometime in the future. For example, the United States government is currently determining whether Ethereum is or isn’t a security.
Since a lot of rulings are still up in the air and guidelines are unclear, this has led more projects to remain cautious on opening up ICOs to certain nations. If you’re interested in investing in a particular ICO, it’s essential to browse the project website for possible nation-based investment restrictions.
In the current trend towards an increasing number of ICOs, we have begun to see what makes some projects stand apart from others. As we discussed earlier the target industry and technological innovation of a cryptocurrency project builds the foundation for investor evaluations. If the project has these in place, then it’s best to look at some more evaluation factors to consider before investing.
Before an ICO, most projects have an experienced team in place. You should research which companies the founders worked for previously and what they have accomplished throughout their careers. This applies for various positions on the team: blockchain engineers, marketers, industry-specific experts, UI/UX designers, legal advisors, and any other relevant roles.
Teams should generally be able to demonstrate prior success either within corporations or in entrepreneurial ventures. Also, be aware of fake project team profiles as this is a common trait of ICO scams. For example, ICOs in the past have used well-known entrepreneurs like John McAfee or even a photo of Ryan Gosling to create a fake team.
One of the biggest factors for determining adoption is whether or not companies in an ICO’s target industry show support for the project. If a project does have financial support from a well-respected company or if a company plans to integrate the project’s native token, these are generally positive indicators of marketplace adoption post-ICO.
While such partnerships don’t necessarily equal to immediate price increases, they are an integral part of establishing long-term success.Industry support demonstrates that not only does the project have the potential to develop blockchain technology but can also market its technology for use in real-world scenarios.
Cryptocurrency evaluation is often determined by liquidity. In other words, do people want to buy and sell a given token? As the number of partnerships increases, people will have more genuine reasons to use a given cryptocurrency as a form of P2P payments and move away from thinking of it as merely a digital asset.
Similar to national economies with fiat currencies, the cryptocurrency economy utilises a concept called tokenomics. Essentially, investors should examine who owns the token supply and how that might change over time. For example, some cryptocurrencies are highly centralised, meaning that the founders own a large majority of the token supply. For potential ICO investors, this can be a warning sign not to invest. If the founders decide to sell all of their tokens at once, this could lead to sharp price declines due to a rapid increase in a token’s availability.
Even popular cryptocurrencies like Ripple are still highly centralised; however, the Ripple project team and most other cryptocurrency project teams are beginning to move towards greater decentralisation of token supplies. ICO investors should also look out for how many tokens are available during the ICO and in the coming years post-ICO. For example, if a project team has one million tokens available during the ICO but plans to have a maximum supply of one billion within just a few years, we can expect that this will create a high probability for rapid inflation. We have seen this in extreme scenarios in the fiat economy in nations like Venezuela in 2017-18 and even to an extent in the United States in the aftermath of the 2007-2008 recession due to quantitative easing (QE) policies.
The purpose of cryptocurrency projects should be to avoid rapid inflation as we see in national economies by creating and enforcing strict token supply policies.