The Mobius project recently launched an initial coin offering (ICO) over the Stellar network with a total funding of over $39 million. In the same week, the ICO Prodeum defrauded investors in an exit scam to tune of potentially millions. With no trace left of its original website, Prodeum simply vanished off of the face of the Earth.
What do these two news stories tell us about ICOs? Not every ICO is created equally and more often than not, cryptocurrency conforms to the tenants of Murphy’s Law. More specifically, if someone can scam you they will scam you.
Out here in the wild west of cryptocurrency speculation, it’s difficult to assess which ICOs actually have the potential to create value, which will be the next Bitcoin, or which ones are simply an elaborate scam. In the infancy of the cryptocurrency craze, why are we so hot to seek out the next Bitcoin or declare the entire trend dead in the water. Patience is a virtue and that holds no more true than in the field of investment.
Should these news stories dissuade you from investing in an ICO? If you’re familiar with the eponymous Betteridge’s Law, then you know the answer. A better question would rather be: Do you feel lucky, punk?
While ICOs are risky, there are plenty of advantages to investing in one. On the other hand, there’s also plenty of reasons why most speculators wait until the token hits market, if it ever does. So what is an ICO and which will one will better serve your wallet in the end? Let’s find out.
What is an ICO?
An ICO is somewhere in the middle between crowdfunding and an initial public offering (IPO). Unlike IPOs, ICOs are completely unregulated, leading to scams, but also higher speculation.
Many businesses fund their business through the use of venture capitalists or angel investors in exchange for a share of equity in the company. IPOs offered the opportunity to fund your business, while not giving up a major stake in your company to a single person. ICOs, on the other hand, don’t relinquish any share in a company. This benefits businesses who keep the majority ownership of their business, but it’s a disadvantage to initial investors as business owners remain unaccountable to anybody but themselves.
Yet, an ICO is not considered crowdfunding though. So what do investors get in exchange for their investments? Tokens (i.e. cryptocurrency). Depending on the ICO, their funds may be locked into a contract for a few months.
Most ICOs are held over P2P networks, like Ethereum or Stellar, and created using a decentralized app (DAPP). You can’t buy into an ICO with fiat currency, as most require either ETH or BTC. Most of these networks offer smart contracts to accredit transactions without third party interference (e.g. regulation).
Most ICOs are based on funding for a project outlined in a whitepaper or developed as a prototype. The funding helps them to build out there networks and scale their blockchain technology.
Advantages of the ICO
- Fund projects that offer utility to businesses or consumers
- The potential to buy valuable tokens at dirt cheap prices
- The ability to exit before the ICO window is closed
- Create media exposure for the business and token
- Lack of barriers (e.g. paperwork and red tape for an IPO)
- Be a part of a community
The main incentive for investing in an ICO is the hope or knowledge that a token and the underlying business will rise in value once it hits market. It’s a lot like crowdfunding because your investments give a business the opportunity to fully execute a potentially disruptive or revolutionary product.
Some things to keep in mind before investing in an ICO include:
- Transaction fees (these can be arbitrarily set)
- Market Cap (the value of each token in supply added together)
- Service rendered- what value does it provide?
- Market demand- how much buzz surrounds the token and how many businesses are bound to use the product or platform?
- Market supply- what is the set supply of tokens?
- Will the token be available over open market?
These same considerations should be taken into all of your cryptocurrency investing decisions. The biggest factor to consider is whether you’ll be able to purchase a token after an ICO over an open exchange. Typically, tokens over the exchange will be a higher price, although it shields you from a potential scam.
Why Speculators Wait
If a token is available over an exchange, it’s a better idea for speculators to simply wait a few weeks and avoid the ICO altogether. Of course, this all comes down to personal preference and your skin in the blockchain community.
Once a token hits the open market it will initially be higher priced than its ICO offering. Many people suggest waiting a few weeks for a price drop to invest. There's no guarantee what exchange will be accept the token and one could end up on any exchange from Kraken to smaller exchanges like Ethbits.
The biggest reasons to wait after an ICO include:
- Risk aversion from ICO scams
- More time to assess market demand
- Grow the value of your ETH and BTC in the meantime
- Funds don’t get locked in time restricted contracts
Not all ICOs are created equal and the choice between investing in an ICO or not depends on your faith in the project and your cryptocurrency interests. Are you a financial backer or just a pure speculator?