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 company’s 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 ICOs
First, 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 startup’s 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 startup’s developer team after the launch?
As you can see from the above-mentioned questions, it is important to be very critical towards the projects you could see yourself potentially investing in as the current hype around initial coin offerings has led to a wave of startups launching ICOs simply to make money without actually having developed anything viable. There have also been several unfortunate instances of ICO scams. Hence, conducting thorough due diligence before making an investment in an ICO is absolutely vital.
Once you have found an ICO you would like to invest in, you simply register on the startup’s ICO page when the crowdsale period has started and make your investment using bitcoin, ether or whatever other currency is accepted during the token sale.
When the crowdsale period has ended, your new tokens will be issued to you shortly after and can usually be found in a designated wallet on the startup’s ICO page where you originally registered to make the investment.
The new token will usually start trading on exchanges one or two weeks after the crowdsale has been completed. You can then choose to hold your tokens on the startup’s crowdsale platform or transfer them onto an exchange should you wish to trade them.
Top Performing ICOs
Some of the best performing digital tokens that have come out of ICOs include Lisk (LSK), Stratis (STRAT), Qtum (QTUM), Gnosis (GNO), Iconomi (ICN), and the second largest cryptocurrency Ethereum’s ether (ETH).
Stratis, for example, offers a blockchain-as-a-service platform targeted at financial institutions and corporations that want to develop business solutions using blockchain technology. It held its crowdsale in July 2016 where it managed to raise around $600,000. The Stratis token was launched at a price of $0.007. Today, Stratis trades at around $4.50. This marks a 64,000 percent increase in value in one year.
Another example of a very successful ICO was the crowdsale of Ethereum, the decentralised blockchain platform for smart contracts. The Ethereum Project held its ICO in August 2014, where it raised around $18 million. One ether token was worth around $0.31 during the ICO and started trading at around $2.50 when it hit the exchanges in August 2015. Today, the price of ether is over $200. That means that early ether investors made a return of over 50,000 percent provided they held onto their coins until now.
While these examples show very impressive returns, there have also been enough ICOs whose tokens lost value after they started trading on exchanges.
Not All ICO Tokens Perform Well
Examples of recent underperforming token sales include the ICOs of Monaco and TenX. Both startups are working on digital currency card solutions similar to the Wirex Debit Card and to fund their developments they raised money through token sales. However, both Monaco’s and TenX’s digital tokens have underperformed and both were trading below their ICO issue prices at the time writing this article.
The two above-mentioned ICO tokens are not the only ones that have underperformed after their crowdsale. Bancor (BNT), Cofound.it (CFI), and Status (SNT) are all recent ICO tokens that are currently trading below their ICO issue prices.
Should You Invest in ICOs?
Whether you should invest in an ICO or not is, of course, entirely up to you. ICOs are a very risky investment that could easily lead to heavy losses if you pick the wrong project to invest in. On the other hand, the top performing ICO tokens have become leading cryptocurrencies that have generated exuberant returns for their investors.
If investing in ICOs feels too risky or too technical for you, then you are probably better off buying bitcoin. Bitcoin is still the leading digital currency and one of the best performing digital assets in the market. That will likely remain to be the case in the years to come.