Many cryptocurrency investors are getting their feet wet by opening an account on a cryptocurrency exchange, funding their account, and buying some Bitcoin. Others are branching out and buying other coins to hold alongside Bitcoin. Then you have investors looking for ICOs to purchase coins before they hit the publicly traded markets.
If you’ve been hearing the ICO buzzword around blockchain and cryptocurrency communities, and you’re keen to learn more, you’ve come to the right place. Anyone interested in joining an ICO should read our guide to understand the landscape around these investment opportunities.
What is an ICO?
To start, ICO stands for Initial Coin Offering. Many investors make the common comparison to an Initial Public Offering, or IPO, with a company’s stock. This is when investors can first publicly purchase shares of stock. An ICO is similar where it’s the first public offering to purchase coins for their blockchain project.
Blockchain projects typically use an ICO as a fund-raising technique, selling coins or tokens for funds to devote towards furthering the company or project. There are often private sales that precede a public ICO, but the initial coin offering represents the general public’s first opportunity to purchase the coin or token from the blockchain company.
What are the potential advantages to an ICO?
So why would an investor be drawn to investing in a blockchain project’s ICO? The chief advantage is the same as being an early investor in any company or business project. The objective is that the company or blockchain project is going to use those funds to grow and make the company and/or coin more valuable in the future.
Investors participating in an ICO are purchasing coins before they hit the public exchanges. Once a coin reaches an exchange, the trading volume rises. If the coin makes its way onto a large exchange with large amounts of investors, traders and volume, new investor funds can easily move into the coin and push the price up. The advantage for ICO investors is the potential upside of the coin once it hits a bigger exchange and attracts tons of other investors.
What’s the process for investing in an ICO?
The specific process for investing in an ICO depends on the particular ICO. Each handles the process slightly differently.
But let’s take a look at a common example of an ICO for an ERC20 token, which is a blockchain and token built on the Ethereum network. These ICOs accept Ethereum coins (ETH) as payment for their native, ICO coins, and they typically accept payment to a publicly available Ethereum wallet address.
Investors send their ETH tokens they wish to invest to the ICO’s wallet address. Each ICO has their specific way of confirming payment receipt, but you can expect to provide your email and receive an email confirmation acknowledging receipt of your contribution. When sending your ETH investment, you also specify the destination address for them to send the ICO tokens. Once they release the tokens to ICO investors, they will send them to the address that you provided.
It’s important to note that chances are you won’t be receiving your tokens immediately after your ETH payment. Often times, ICOs run for several weeks or a month, and they will distribute tokens once the ICO public sale is closed. They will also usually disclaim that you might not receive tokens for up to 30 days or a specific date.
Investors participating in ERC20 token ICOs often use an online wallet like MyEtherWallet to send ETH and receive ICO tokens. MyEtherWallet supports all ERC20 tokens, so you will be able to accept tokens from an ICO built on the Ethereum network easily through your MyEtherWallet.
What should you do before joining an ICO?
Before joining an ICO, you need to do your due diligence and research on the blockchain project you are investing in. Because purchasing ICO coins is similar to buying stocks of a company, you want to perform the same standard of research (and probably more given the risky nature of ICOs). You want to make sure the ICO you’re investing in has a viable project, experienced development team, good reputation, understandable business model, and of course, growth potential.
There are various ways to do research online by finding the ICO’s website and searching for information through search engines and forums. But starting with the ICO’s website, a legitimate project is probably going to have a well laid out website. There you will want to find the team behind the ICO, especially the development team. The vast majority of real investable projects will be transparent around their internal and development team, commonly having them displayed on the website along with bios, credentials and social media profile links. If the ICO team is anonymous, this is a major red flag.
Searching through forums and cryptocurrency communities (like BitcoinTalk) is another great way to find other sources of information about an ICO. There are plenty of other potential investors that have done their research on the project and are open to sharing their thoughts, ideas, and concerns. For some ICOs, you might find members of the team active and sharing up-to-date information about the project and its development. Plenty of community members also play devil’s advocate in popular forums and raise pressing questions regarding ICOs. With all the skepticism surrounding ICOs, it’s important to have solid answers about how the blockchain project and token are going to succeed.
What makes an ICO a good investment?
So what factors make an ICO perfect for investment? Well, that’s a good question. It relates back to what makes anything a good investment opportunity: risk vs. reward.
When investing in cryptocurrencies, you’re definitely anticipating a larger potential return than other traditional investments like stocks or bonds. But at the same time, you know the risk level and volatility of investments are much much higher. So you need to identify ICOs with a solid risk to return ratio after you do your research and analysis.
Here are some factors to consider when debating whether the ICO is a good investment for you:
- What are the potential risks?
- Is the project a scam?
- Does the team have the experience and skills to develop the product?
- Does the team have the marketing abilities to promote the product?
- Who does the product serve?
- What are the odds of widespread adoption of the product?
- What is the team planning to do with the ICO funds?
You should be able to understand what the blockchain project or business is proposing and planning to do and what customers they are targeting in order to be an educated and informed investor in any ICO. (If you are brand new to blockchain technology and cryptocurrencies, you can review our Bitcoin 101 article here) [link to Bitcoin 101 article]
How do you find out about an upcoming ICO?
There are various ways to stay current on upcoming ICOs. Several websites host a list of upcoming and open ICOs, including information for potential investors. Check this list of ICO-listing sites.
What are the risks of joining an ICO?
Now, this might be the most important section of the guide here. There are tremendous risks to consider when investing in an ICO.
ICOs are seen as very, very speculative investments in digital currency. Again, it’s similar to startups seeking venture capital in fiat currency to fund the development of their project. Often times there is no product yet, just speculative virtual currency in the case of crypto projects, and the funding is needed for project development. So you have major risks related to the development team’s ability to develop products in a timely manner, or at all. This is why it’s so crucial to have the development team and white papers public and to know who is behind the project and platform, which adds a bit of trust for investors. Occasionally these are open-source projects, in which case it is imperative to do research on who is involved.
Of course, there's the risk of the project being an outright scam. With so much interest, securities, and money being raised into the ICO and cryptocurrency space, many bad actors are taking advantage of the trend to create fake blockchain projects and ICOs in order to steal funds from desperate investors. Because cryptocurrency payments allow for a certain amount of anonymity, these bad actors can create scam ICOs and disappear with lots of funds without getting caught. So again, anonymous teams are a typical calling card for scam ICOs.
Then you also have the risk of most transactions, and that’s sending funds to the wrong wallet address. If you don’t send your coins to the ICO address, they won’t get the funds and you won’t get any ICO tokens. You also need to ensure you give the correct receipt address so they send the funds to you, and not someone else’s wallet.
Investing in ICOs is risky business, but could lead to huge returns. It takes a lot of research and work to identify the best blockchain projects and ICOs. But if you’re up for the task, you now have the basics to get started.