Here’s What You Need to Know Before You Invest in an ICO

The price of Bitcoin has surged from just over $1,000 in the beginning of 2017 to over $15,000 in 2018. Many other cryptocurrencies have followed very similar trends. As a result, it is only natural that ICOs have witnessed a huge flurry of attention from people in just about every corner of the world.

ICOs have captured the attention and interest of millions. Everyone from seasoned investors to curious newbies trying to get their feet wet seems to want to get involved –  and it’s no surprise why.

With such figures, it’s almost tempting to dive in headfirst without fully understanding what you’re getting yourself into. Some people are even seriously considering to take loans to invest in cryptocurrencies (although, this is definitely not recommended!).

But before you get involved, it’s important to understand the basics. While investing in cryptocurrencies and ICOs does have the potential to help you earn a large sum of money within a very short space of time, there is also a lot of room to make mistakes – especially if you’re just starting out.

In the fast-paced world of ICOs, even a little research can save you from making some very costly mistakes.

What is an Initial Coin Offering (ICO)?

An Initial Coin Offering (ICO) is referred to as a “token sale” or an Initial Public Coin Offering (IPCO). It is a form of crowdfunding using cryptocurrencies.

ICOs are unregulated. They are often used to bypass the intensive capital-raising process required when gaining funding from more traditional methods such as venture capitalists and banks. As a result, they have become an increasingly popular source of capital for startup companies.

The first ICO was held in July 2013 by Mastercoin– now known as Omni. However, the concept of ICOs didn’t become mainstream until 2017.

Once things caught on, the popularity of ICOs spread like wildfire. By November 2017, there were approximately 50 ICO offerings per month.

Ethereum is currently the leading blockchain platform for ICOs. It was created by Vitalik Buterin. His aim was to create a platform that would go beyond the financial use cases that Bitcoin was limited to. The white paper describes it as an alternative platform that can be used by developers to build any kind of decentralized platform.

Ethereum currently owns more than 50% of overall market share. Tokens built from this platform are known as ERC20 tokens.

The Ethereum ICO was held back in 2014. The founders managed to raise an impressive $18 million worth of Bitcoins. Back then, 1 Ether was only about $0.40. However, since the project went live in 2015, the cost has surpassed $700.

invest in ico

How are ICOs Different to Traditional Funding Methods?

Unlike Initial Public Offerings (IPOs) where investors gain shares of the ownership of a company, ICOs can sell a right of ownership or royalties to a project. ICOs have far fewer regulations than IPOs, which is part of what makes them a much more popular option.

In order to invest, people must buy “tokens” from the company. These tokens often appreciate in value if the business venture is successful. However, if the venture is unsuccessful, they will likely depreciate.

If the funds raised during an ICO don’t reach the minimum amount as determined by the firm prior to the launch of the ICO, the money will be returned to investors and the ICO will be deemed to be unsuccessful.

How Do I Invest in an ICO?

Most people have heard of ICOs by now, and most people probably even know how to buy major cryptocurrencies like Bitcoin and Ethereum.

However, far fewer people know exactly how to decide whether an ICO is worth investing in, and even more importantly, how to actually buy tokens.

1. Buy Bitcoin or Ether From a Crypto Exchange

First of all, you’ll need to buy Bitcoin or Ether. You can do this on a crypto exchange website. Coinbase is one of the most popular exchanges for beginners due to its high-security levels and simple user interface.

You’ll need to buy these cryptocurrencies a few days before you wish to take part in the ICO because it can sometimes take a little while for the transaction to go through.

2. Transfer Your Bitcoin or Ether to a Crypto Wallet

There are many reasons why you should always transfer your cryptocurrencies into a secure wallet. You should never leave them in the exchange. Exchanges are significantly less secure than wallets, and they are increasingly becoming targets for hackers.

In addition, you cannot participate in an ICO if your cryptocurrencies are stored on a centralized exchange. This is because you don’t actually own the private keys, which are required for ICOs. If you try to buy tokens by sending money to an ICO, the tokens will simply be sent to the exchange and you won’t receive them.

To buy tokens, you will need to send your Bitcoin or Ether to the ICO. Once you have done this, the number of tokens that you have purchased will immediately be sent back to your address via a smart contract.

Some popular Bitcoin wallets include ExodusLedger Wallet, and Electrum Wallet.

3. Send Your Cryptocurrencies to the Required Address

Once you’ve transferred your cryptocurrencies to a secure wallet, you will have your own private key that allows you to receive tokens.

On the website of the token sale, there will be an address where you can send your cryptocurrencies to in order to buy tokens. It is vital that you double check this address before sending large amounts of money, as transactions cannot be reversed and scams are becoming increasingly common.

For example, in July 2017 the CoinDash website was hacked. The address on the website had been changed, causing investors to send their cryptocurrencies to the wrong account. In less than half an hour, over $7 million Ether was stolen.

So, always watch out for hot crypto news topics.

4. Store Your Tokens Securely

It is important that you find a secure way to store your tokens – especially if you have a significant amount of money invested.

When choosing which wallet to use, there are a few things you should keep in mind. Ask some questions and you’ll receive the answer.

  • Cost: How much does it cost to use the wallet? Is it free or is there a fee?
  • Security: How secure is the wallet? Does the company have a good track record?
  • User Interface: How intuitive is the wallet?
  • Mobility: How accessible is the wallet? Do you need to be on a certain device to use it?
  • Support: What cryptocurrencies does the wallet support?

To maximize your security, it’s best to use an offline wallet that is not connected to the internet – also known as a ‘cold wallet’.

Are Most ICOs Scams?

ICOs can be very beneficial for a number of purposes, from corporate finance to charitable fundraising. However, with the recent boom in popularity, many are increasingly being used for fraud.

As ICOs have gained more traction, there have been increasing concerns over potential financial scams. As a result, China banned ICOs in September 2017. Korea soon followed suit. 

Newbie investors, in particular, are increasingly becoming targets for “pump and dump” schemes. This is where wealthy investors – also known as ‘whales’ – “pump” money into a cryptocurrency to generate interest and attract more investors. The purpose of this is to artificially drive up the price.

When people see that the price is rising, they will invest in the cryptocurrency themselves. When the price is high enough, the investors then “dump” all of their tokens, driving the price back down and making a lot of money in the process. In some cases, even the developers themselves have confessed doing this.

While many ICOs do provide fair, lawful opportunities, it is important to remember that they are still high-risk investments that are often in an early, and therefore high-risk stage of development. Many offer little protection for investors.

In November 2017, the founders of Confido, the ‘smart contract startup’ disappeared with over $375,000 of investors’ money.

To Invest in ICO or To Not?

To confirm the legitimacy of an ICO, there are a few things you should look out for before making an investment:

  • What has been built?

    Do they have a prototype that allows users to see the technology behind the idea, or is this just a “whitepaper ICO”? It’s becoming easier than ever to create an ICO, and the recent boom means whitepapers can be outsourced on websites like Fiverr for as little as $100.There are now many ways to get pre-funding for an ICO. If an ICO has neither a prototype or technology before the launch of the official ICO, this is definitely a red flag.

  • Is the team actually capable of completing what they set out to do?

    As with any venture, the team behind the idea is often even more important than the idea itself. Even the most basic ideas can go far with a dedicated team pushing them forward, but even the most sophisticated idea will fall flat if the team is incapable.In the same way that you need to evaluate the team for an Initial Public Offering (IPO) or venture capitalist investment, it is necessary to make sure the team behind the project is really capable of completing what they set out to do by evaluating their skills, prior experience, and management.

  • Governance 

    ICOs are different from IPOs. One of the main differences between the two is that unless clearly stated otherwise, the vast majority of ICOs will not give token purchasers voting rights, governance, or a share in the profits.

  • Compliance 

    You should always check to make sure that the management has complied with the security regulations necessary for their ICO. You should research the counsel for the ICO, and make sure they have a track record of relevant transactions.

  • How scalable is the token?

    It is important to be able to evaluate whether the token you are investing in has any application, as opposed to being just another me-too product.

  • Does the ICO have a strong community backing it?

    If an ICO is backed by a strong community, this confirms that there is demand for the project. Even the best, most technically advanced project will fail if no one needs it.

Where Can I Find ICOs to Invest in?

There are many websites providing a list of current ICOs. Some popular options include the likes of Coinschedule and TokenMarket. These show current cryptocurrency ICOs, token sales, blockchain events, and ICO stats.

The Future of ICOs

As a result of the buzz generated by cryptocurrencies in late 2017, the Securities and Exchange Commission (SEC) that is responsible for regulating America’s tradable financial assets, has turned its attention to ICOs.

This may not seem like a huge deal at first glance, but as always it is likely that what happens in America will have a large impact on what happens in the rest of the world.

This is largely a result of the increasing number of concerns that have been raised about the opportunities for fraud and manipulation – likely due to the current lack of investor protection in comparison to traditional markets.

However, there is also a large chance that we will experience a significant slowdown in the number of ICO investment opportunities available in 2018 as the initial buzz dies down.

At first, we will probably perceive this as the “bubble burst” we have been anticipating. However, the likelihood is simply that the reduction in the number of ICO opportunities available that we are about to witness will simply be a result of fewer scams.

What’s your opinion on investing in an ICO? Share your thoughts below!

Feature image by Angelx77