What are ICOs and should you invest in them?
Aug 2, 2017, 12:52:35 PM Published By Wirex Team
In the past six to twelve months the cryptocurrency community witnessed a massive boom in so-called ICOs. ICO stands for initial coin offering and is the cryptocurrency markets equivalent of a stock IPO.
What are Initial Coin Offerings (ICOs)?Initial coin offerings (ICOs), also known as initial public coin offerings, crowdsales or token sales, are a new form of startup funding where a company raises funds by issuing its own digital token to early backers in a somewhat similar manner as a company would issue shares to new investors. ICOs tend to run for a two to four week period and investors usually buy the new token using either bitcoin, ether or other digital currencies. The difference between a stock IPO and a cryptocurrency ICO is that the price of the newly issued digital token is only indirectly driven by the performance of the startup that is raising the funds and that the token holders have no claim on any of the companys assets as it would be the case for shareholders. Also, the market for ICOs is still entirely unregulated, which makes it very risky for investors as no due diligence is conducted by financial regulators on these new investment offerings. For startups looking to raise funds, initial coin offerings are a blessing. ICOs allow new startups and blockchain projects to fund themselves by raising money in the form of digital currency. Furthermore, following the crowdsale, startups can then also benefit from an increase in the value of their newly issued digital tokens if their project performs well. For investors, on the other hand, buying newly issued ICO tokens is a high risk/high return venture. Some ICO tokens have outperformed and generated over 10,000+ percent return for their holders while other ICO tokens have lost value since they were issued and never recovered back to their original launch price.
How to Invest in ICOsFirst, you need to become aware of which ICOs are scheduled in the coming weeks. Platforms such as Smith & Crown and TokenMarket, for example, offer ICO schedules that list all upcoming crowdsales. Once you have had a browse through the list of upcoming ICOs, you can have a closer at each one to decide which one may merit an investment. Then, to decide whether or not you want to invest in an ICO, you should ask yourself the following questions:
- Is the startup a registered company? And if so, where?
- Who is the team behind this project?
- Is the team reputable and do they have the experience and skills need to create the product or service they are raising funds for?
- Does the startup have a product or service ready or are you only investing in an idea?
- How likely will the startups product or service perform once it is built? Are there better competitors?
- Does the new digital token have any real-world applications or is it just being issued to raise funds?
- Does this startup actually need an ICO to fund itself or could it simply use traditional funding routes?
- How many tokens will be issued? Is there a finite supply of the new tokens?
- How many of these new tokens will be held by the startups developer team after the launch?