By David Webb
Initial Coin Offering (ICO) trading revolves around businesses offering new units of cryptocurrency or crypto-tokens to investors and early backers, in exchange for a legal tender or established cryptocurrencies like Bitcoin. This innovative tactic is mostly used by newly-emerging businesses to publicly acquire funds in cryptocurrencies.
The process resembles the offering of shares, except in this case, company assets are sold for digital currencies. In fact, you could say that it is more similar to crowdfunding efforts, ones aimed at fueling development of a new venture. So, this is not your typical, straightforward investment opportunity. To assure success, you have to weigh many different factors before diving in.
A slippery slope
ICOs are a hot topic among the ranks of crypto investors. Bitcoin is making headlines daily, but there are more than a thousand coins floating around exchanges, with many more being added as we speak. Some of them lure investors with immense return potential. One of the best performing ICOs of all time (IOTA) recorded a mind-boggling 332,500% ROI.
Yet, as much as there is hype, there is also a high level of concern linked to risks factors involved for buyers and sellers, such as economic uncertainty and information security.
But, let us start with the fact that just like cryptocurrency trading, ICO investing is largely unregulated. Startups offer ICOs to maneuver around a rigid and highly-regulated process of conventional capital raising. They see various benefits in this strategy and there is not much stopping those ready to engage in fraudulent activity. Investors can become a target of scams and lose a lot of money due to unscrupulous individuals.
Two sides of the token
So, what can the investors do to safeguard against such scenarios and manage present risks?
Well, they should always be crystal-clear on what exactly they are buying from the company. You are probably aware that tokens are equivalent to certificates and vouchers and other documents that verify ownership of a certain company asset. However, there is no one unifying mechanism for ICOs. Companies may choose to sell basically anything they want, including ownership of intellectual property, dividends, virtual values, etc.
So, always double-check what the token you buy is linked to. See if you can find relevant info in a white paper. You want to see details regarding a token (purpose, hard cap, base price, distribution, etc.) clearly spelled out. Moreover, bear in mind that the value of the token is all but guaranteed or set in stone. Any additional emission of them, which is the discretionary right of the company, would lower the value of existing tokens.
A broad view
Furthermore, assess the technical side of trading cryptocurrencies. Research what are the partners of the company offering ICOs. Identify platforms and systems that conduct the exchange of token for electronic money. In general, transactions are carried out via a system called blockchain, but not all cryptocurrencies have their own dedicated blockchain. Also, there are private and public blockchains.
What makes things even more complicated is that there is an overwhelming amount of noise and hearsay out there. It takes some work to find ICOs that are credible and bring great ROI. So, make good use of reliable sources such as the Blockchain review to gain deeper insight into new ICOs and various topics. At the same time, try to grasp the bigger picture and anticipate where the whole market is heading.
For instance, you should know that after Facebook’s blanket ban on cryptocurrency back in January, Google has recently updated its advertising policy to include its own ban on cryptocurrency ads. These are precautionary measures that are supposed to mitigate the negative effects (such as consumer harm) spilling over from a highly volatile crypto ecosystem. They affect the value of main digital currencies and contribute to further price fluctuations.
Ultimately, the trust in the exchange deal should echo the general trust you have in the project of the company and its roadmap. So, to stay on the safe side, get to know who the management team, advisory board, and executives are. You should be able to find such information on a company’s website or LinkedIn profile. Its absence is potentially a red flag.
In addition, gather as much data as you can via the internet. Do your research using trustworthy sources, such as interviews and press releases. The existence of a prototype is a positive signal a well. Finally, while doing an online checkup, keep an eye on a green padlock icon in the left of the address bar. It indicates that website is safe and legitimate. For better or worse, the devil is often in the details.
Time to strike gold
There are not many financial instruments that promise such lucrative rewards as ICOs. Still, this is a risky investment opportunity. New offerings are being launched every day and not all of them are created equal, some offering quite shaky prospects of returns. You often cannot rely on telltale signs like years of operating history and documentable finances of a company emitting ICOs.
Therefore, the key to separating the wheat from the chaff is in due diligence and research. Do your homework to avoid losing money out of your own negligence and oversight. Seek well-thought-out projects of promising and legitimate businesses. Following these steps, you should be able to find a real gold mine and elevate your portfolio in 2018.
— David Webb (@DavidWWWebb) March 12, 2018