The Pros and Cons of Investing in an ICO

An Initial Coin Offering, or ICO, tends to give us the impression of an IPO in cryptocurrency-based investments. Companies try to raise funds by selling their tokens, which acts as a co-equal of a stock. Investors buy these tokens instead of a share or stock in an ICO. One can buy the tokens with three different kinds of funds:

  • Bitcoin, a cryptocurrency
  • Ether, a token
  • Fiat currencies

Blockchain-based companies and startups find ICOs as a very agreeable source of crowdfunding. These companies use these funds to try to develop their existing products, launch a new product or start their own cryptocurrency. These tokens can be sold and traded on all cryptocurrency exchanges. However, investors need to keep their eyes open for any red flags.

The first ICO that ever went up for sale was Mastercoin, which is now called Omni. It was introduced in 2013 and raised about 120 million USD in asset market capitalization. However, it’s current market cap revolves around 2 million USD. Anticipating the coin’s future is tough but it was one of the first innovations that made us believe we can still go ahead of where we are in terms of enhancing the chain.

ICOs are however misconstrued as a cryptocurrency, but in reality, they are very different from each other. A cryptocurrency is based on a ‘proof of work’ security protocol whereas an ICO is based on ‘proof of stake’. This means that each miner in the cryptocurrency blockchain can get a coin but in an ICO, miners can get a transaction fee or a stake in the company that they are investing in. Thus, being aware of the pros and cons of such a crowdsale should be the first thing on one’s mind.

Weighing the Pros and Cons:

Pros

  • Liquidity value of the tokens in an ICO
    The ICOs, that you invest in, provide you with the tokens that you can trade in a secondary market, where the underlying asset will be the coin you have invested in. This can ensure an acceleration of the return on the investment we make. Investors also get to see how the company is performing based on the secondary market and real-time pricing.

 

  • Ease of accessibility to both investors and startups
    The ICOs provide a platform where the investors won’t have to face the hurdle of being locked out by regulators for not qualifying as a sophisticated investor. This would lead them to pay a premium at an IPO. In an ICO, fundraising and investing become more accessible, thus democratizing the whole process. This process has a low barrier for entry and helps a startup to gain market demand, and establishing a prior relationship with an investment bank becomes unnecessary.

 

  • Redundancy of Paperwork
    In a usual IPO, there are a lot of regulatory filings that need to be done before the IPO is executed. As we know, an investment bank needs to act as a broker to get the IPO started. Here, the bank or the underwriter drafts the below documents on behalf of the IPO:

    • Engagement letter
    • Letter of Intent
    • Underwriting Agreement
    • Registration Statement
    • Red herring document

After going through all these documentations, most projects fail to get the exposure and remain trapped in the red tape.

  • High ROI
    To get an idea about the Return on Investment of cryptocurrencies, remember that ‘$1,000 invested in Bitcoin in 2013 would be worth over $50,000 today.’

Recent ICOs have created a number of huge returns in a short amount of time:

NAME

ICO DATE

CHANGE (%)

CURR. PRICE

NXT

2013-09-28

+374763%

$0.063

IOTA

2015-11-25

+109521%

$0.476

Ethereum

2014-07-22

+64094%

$199.911

Neo

2015-10-01

+50089%

$15.960

Spectrecoin

2016-11-20

+26239%

$0.214

Stratis

2016-06-20

+21804%

$1.593

Stratis raised $600,000 during their ICO in June 2016 and has since seen a 21,000 percent rise in the price. Spectrecoin raised $15,000 in November 2016 during their ICO and has since risen over 26,000 percent. With such a high return on investments, one would definitely want to build up their financial gains.

Cons

  • A whitepaper isn’t sufficient enough
    These startups tend to present their whitepaper without proper resources to get the product ready. Even if the product is ready, there lies a lack of proper implementation. Investing in such an avenue possesses a great deal of hype that surrounds it. As long as the project makes sense and demand for the product in the market seem to be valid, an investor must make a well-informed decision.

 

  • Volatility going haywire
    Since 2013 we see the underlying assets in ICOs, i.e the cryptocurrencies took us for a rough odyssey through its dynamic prices and we realized how our forecasts can mean nothing when it comes to understanding a product. Today, Bitcoin is one of the most stable coins even after witnessing the bitcoin bubble fall from a high of $20,000 to $6500 in November 2018. ICOs can be equally drastic when it comes to volatility. Without proper knowledge of the factors that affect the product of the ICO, investing in one can leave an investor at huge losses.

 

  • Potential Frauds
    There are different ways in which an ICO can go bankrupt or become a victim of the frauds. Some popular scams are listed below:

    • CoinDash: Theft of $7 million occurred when a hacker replaced the legitimate address for buying tokens with a fraudulent Ethereum address.
    • The DAO: A hacker was able to siphon off 3.6 million ethers.

Insurance against such hacks and frauds is a must as the technology is advancing and attracts a lot of investor attention. Due to the substantial risks involved in such tokens, many refrain from investing. Launching an ICO seems easy since all that is required are programmers and the internet, but in reality, there needs to be a very strong security system involved.

Apart from the above information, it is always best to do your own homework before investing in an ICO. Weigh all the pros and cons you find and make sure that its worth your money. Participating in such ventures helps you learn a lot about the type of projects or whitepapers you want to invest your time and money in. There are a lot of speculations going around but the only one helping you out is yourself.

What are your views on investing in an ICO? Let us know in the comments section below:

2 thoughts on “The Pros and Cons of Investing in an ICO

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