Investing in ICO is a promising opportunity, which is much talked about, but, as often happens, many risks and pitfalls are not completely clear. How to distinguish a potentially profitable ICO from one that brings only disappointment to an investor? This article just trying to find the answer to this question.
What is ICO?
ICO stands for an initial coin offering, which translates into Russian as “primary placement of tokens”. This is a process that represents a set of activities for pre-issuing and selling a new type of digital token to investors for the purpose of obtaining the profit necessary to launch a new project.
If we take into account the mechanics of work, ICO is a kind of synthesis of crowdfunding and IPO (initial public offering of the company, “initial public offering” in the language of financiers).
Suppose a person has a ready-made business model with good potential associated with blockchain technologies, but there is no money to launch a project. It acts on the principle of crowdfunding:
- studies the market, competitors, the prospects of their product;
- recruiting people for ICO, registering a company;
- prepares whitepaper – a document in which he talks about a startup and why investors should be interested in them, as well as about investment conditions;
- conducts a PR campaign, the purpose of which is to inform potential investors about the startup;
- releases tokens and sells them to interested parties, who thus become investors.
The last point is, strictly speaking, ICO. All the rest is just preparation for it.
It should be noted that there is also such a thing as pre ICO. This is a closed pre-sale of tokens at a lower price compared to the one that is established directly within the framework of the ICO. Startups often release the alpha version of the product with the money they make and prepare for the ICO – for example, they run an advertising campaign.
Investing in pre-ICO is even more risky than in ICO, since the potential of the product during the ICO can still be somehow assessed, and during the pre-ICO, it is almost impossible to do so, the investor gets the cat in the bag.
Why do you need to invest in ICO?
Ethereums in the process of conducting an ICO cost less than $ 0.5. Now the rate of ethereum – almost $ 300 per unit of currency. This is not the only example of successful projects that conducted ICOs at the dawn of their existence – when no one could predict the degree of their success. The profitability, for example, of the Stratis ICO for investors today is more than 100,000%, and the ICO Neo is almost 60,000%.
The sale of tokens during ICO, when they grow in price several times (or even several dozen times), is the first reason why people actively invest in ICO today, and discussions of new start-ups constantly appear on the Bitcointalk forums.
The second reason investors invest in an ICO is to get bonuses or other benefits from the company. Some companies that decide to hold an ICO have a very indirect relationship with blockchain technologies. Sometimes it consists only in issuing an own token and conducting an ICO, and the project itself, for which money is collected in this way, is far from the scope of cryptocurrency. It may be at least the opening of an online store or clinic, although the production of toys.
To attract investors, such companies are developing a number of attractive conditions that allow owners of tokens to use the product on favorable terms. For example, they will be able to buy goods at an online store at a special price or will receive the right to use any service at the clinic for free. Some tokens approach shares and give the investor the right to vote when making decisions at the administrative level. Also, if the startup proves successful, they can again be resold at a price that exceeds the purchase price several times.
The third reason why people invest in ICO is the desire to support a startup. For example, it may be aimed at the development of a certain branch of science or at the introduction of some socially useful technology. But even with the successful implementation of the project, there are no significant benefits for the investor. He may receive some privileges, but the investments here are more of a kind of charity. Such projects are understandably the least popular.
Investing in ICO: Is It Safe?
Any investment involves risks. The history of economics has known many cases when super-reliable and super-promising start-ups have failed.
For example, during the ICAO DAO project in May 2016, it was possible to collect over $ 150 million, but hackers discovered a vulnerability in the code, as a result of which they were able to divert approximately $ 40 million from the company’s account.
Cryptocurrency PayCoin also initially looked promising, its creator announced the introduction of innovative technology that will put his brainchild on the same level as Bitcoin, and later even surpass it. As a result, PayCoin did not exceed Bitcoin in any parameter, was left far behind by many, investors did not get anything, and the creator had to leave the United States because of unfulfilled promises.
It may happen that the final product will correspond to the declared whitepaper only formally, but in fact, it will be useless. Sometimes an investor doesn’t get what he wants because the start-up didn’t figure out something, where he made a mistake and failed to “start” the business because of his inexperience. At best, he will return the money to the investor, or at least part of it, at worst, it will disappear.
Legal mechanisms practically do not operate on the cryptocurrency market, ICOs are not legally regulated in any country, and therefore fraudsters often have a chance to go unpunished after a scam in the field of blockchain technologies, unfortunately, is high.
ICO accounts for a huge layer of scams. They are often conducted on the same principle as on traditional crowdfunding platforms, the scammer comes up with a project that is not going to implement, releases tokens, launches ICO, collects money and disappears. It may be that the product will not generally respond to the stated example, the start-up collected money for opening a clinic, and instead began to produce slot machines.
In all cases, the investor loses – at least time, at the maximum of all the money invested. Reliable ways to protect against fraud, alas, does not exist. But there are signs by which it is possible to evaluate a startup and with some degree of probability to assume whether it is fraudulent and if not, it will bring benefits.
How to choose a reliable and profitable ICO?
The choice of a reliable and profitable ICO is based on a thorough analysis of a startup.
The ICO and the preparation for it are, albeit very conditional and simplified, but still a model of the entrepreneur’s work in the first stages of building a business. And the fact that the start-up managed to find and interest good specialists, correctly advertise the project shows that he is quite capable of doing the same after the ICO, which means that his chances of success are higher than those of a person who could not find good ones. specialists.
At the beginning of the article, we schematically described the actions of a more or less reliable start-up – they, as well as their quality and consistency, are indicative of investors, although, of course, they are not the ultimate guarantee of the project’s future.
First of all, you need to pay attention to the market and the competitiveness of the product. The likelihood that a startup will be successful is relatively high if the product meets the following criteria:
- low level of competition;
- solving one of the market problems;
- the presence of a unique, practical, functional ideas;
- market readiness for the product.
The meaning of investing increases noticeably if the product meets two criteria. The probability of getting a good income is very high if you meet three and four criteria. You should not invest if the product does not meet any of the listed criteria.
Whitepaper and the roadmap of the project, which holds the ICO, can tell a lot of investors. These documents are designed to explain to the investor why it is worth investing money in a project, and the explanation must be convincing and appeal not to emotions (“We will have the best!”), But to rationality (what exactly this product will be better than others). After studying such a document, a potential investor should have a feeling that it is really worth investing money, and a clear understanding of why this is advisable.
It is not worth investing if:
- no logical reasoning;
- argumentation is based on unwarranted promises, appeals to emotions;
- The argument is not convincing, there is no way to test it.
Be sure to have a specific description of the finished product and consistent description of the stages of its receipt. A start-up should know what he wants to see in the end and have a clear idea of how to ensure this.
It is not worth investing if:
- the desired result is an abstract intent such as “curing cancer”;
- Stages of achieving the goal look inconsistent, do not meet the realities of life.
The minimum and maximum amount that the startup intends to raise during the ICO should be indicated, and it should also indicate what the money will be spent in case of attracting the minimum amount, maximum and intermediate.
It is not worth investing if:
- the collection goes on the principle “the more the better”, and it is not clear what the money will be spent on;
- it is clear what the minimum amount will be spent on, but it is unclear how the remaining funds will be used.
An important role is played by the distribution of tokens. It is desirable that the team received no more than 30% of tokens and/or was able to trade them after a long time, for example, three years after launch. Otherwise, there is a possibility that all the tokens available to the creators will be on the market as soon as the startup “shoots”, and this is fraught with the fact that other owners will not be able to profitably dispose of them. For the same reason, the conditions of the ICO should prevent the concentration of tokens in the hands of one or two large investors.
The cost of tokens should not be overstated. Otherwise, after an ICO in the cryptocurrency market, it may fall, even if the startup looks more or less promising. As a rule, the price of one token during an ICO is up to $ 1, sometimes much less. So, in ICO Civic 1 token corresponded to 1 cent, and the most profitable ICO of 2016 – Stratis – set a price of $ 0.007.
The work of a good specialist, be it a blockchain developer or a web designer, costs a lot of money. It is not easy to form a good team, and if the start-up has managed to do this, then, most likely, he will stick to the same level of work quality in the future. Attracting incompetent employees sooner or later will lead to the extinction of the project, so you need to look at all at the literacy of documents and other textual information, at the design, at the quality of the code, at the advertising campaign. It is useful to see with what other projects the involved specialists have worked and how they are assessed in their respective fields of activity. You should not invest if the site is made “on the knee”, there is no open-source, the texts are full of errors.
The quality of the advertising campaign can be assessed primarily by the activity in social networks and on thematic sites. Additional reliability of the project gives the content of posts and responses to users in forums and in public. Rare news posting, posting notes that are not directly related to a startup, brief, vague, empty answers to specific questions should alert the investor. Exact facts, figures, promises, supported by statistical data, detailed descriptions and regular appearance of news, on the contrary, indicate that the project exists in reality and is seriously working on it.
The presence of the alpha version of the product allows, firstly, to see what is approximately expected in the end, secondly, at least approximately to assess the quality of work, thirdly, to understand whether the product can be improved to what is stated in whitepaper, and whether roadmap points will lead to the desired result. However, it all depends on the product, and sometimes its absence indicates only that it can be made only if there are substantial funds, to attract which ICO is required.
Finally, it’s worthwhile to read reviews about the project and its discussion on Bitcointalk and other resources where the advertising campaign was launched. They are often attended by experienced investors who know how to evaluate the viability of projects and to which it makes sense to listen, especially to newcomers.
Finally, an important component when choosing an ICO for investment is personal intuition. If something confuses or seems suspicious, it is often better to refrain from making a positive decision and consider alternative options. Ultimately, buying tokens within the framework of an ICO, you must be 100% sure that they are truly capable of bringing you