Initial Coin Offering (ICO) – The Wild West of Fundraising
An Initial Coin Offering has become the mainstream way of raising money for a crypto project. It is an event in which a new cryptocurrency project is introduced. Early adopters and enthusiasts are allowed to invest money into the project in exchange for some of the cryptocurrency tokens. The invested money can be used by the project to cover early expenses like developing the product, marketing, legal, etc. ICOs are highly attractive for investors because the potential reward can be multiple times higher as the token’s price increases during the ICO. ICOs have the ability to deliver quick returns. On the other hand, this is a dangerous game. A quick profit can turn into a big loss. There is no guarantee of success. Best advice for investing is: never invest money you can’t afford to lose.
ICO vs. IPO
ICOs can be compared to a less strict form of Initial Public Offerings (IPOs). ICOs allow both large and small investors to pledge any amount they wish. IPOs are more oriented towards professional investors with a bigger budget. Another characteristic of IPOs is the overwhelming amount of legal paperwork to be completed. ICOs are a bit like the wild west of IPO fundraising. It can be a huge struggle to figure out which laws apply to an ICO. However, a shift is happening towards more legally compliant ICOs. An ICO has to apply the legal terms of each country in which it wants to distribute tokens.
ICO Highs and Lows
ICOs are heated within the crypto community. Recently, Tezos gathered a record-breaking amount of $232 million in just over three weeks! Not all stories are so glamorous. The website of the CoinDash ICO got hacked leaving them with a $7 million loss. The hackers altered the deposit address so investors sent money to the malicious address.
Another example of a failure is KICKICO. Attackers were able to trigger a function in the smart contract* responsible for completing the collection of funds which would send $600 million of their tokens to an unknown wallet address. No money was lost, but KICKICO had to create a new token and reassign it to all shareholders, leaving investors with serious trust issues.
* Smart Contract Definition: Smart contracts are self-executing pieces of code with the terms of the agreement written directly into the lines of code. This can be a direct agreement between a buyer and seller, neither of which are necessarily human.
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Guidelines for Investing in ICOs
So how would you pick your ICO investments? One of the most important aspects of an ICO is the team composition. Scrutinize the whole team very carefully, especially the development team because they are accountable for the successful delivery of the end product. Google each member and visit their LinkedIn profile pages. The purpose of screening each member is to find out relevant crypto experience to realize the project. A supportive community is a crucial aspect of a successful ICO. This can be established by providing clear information and using an open management. Weekly or monthly updates are a good start. Investors want to be personally involved with the project they trust their money with. In addition, clear information can be provided through a well-written whitepaper covering all aspects of the ICO. A whitepaper should at least include technical details, a detailed token distribution breakdown, token purpose and usage, and a roadmap. We see it as the silver platter for potential investors. Next, to a whitepaper, evaluate the stage of the project and if there are any VC (venture capital) investments. As trust is key, a project with a working beta version will get more attention. It gives investors the opportunity to take a glance at the product. VCs tend to invest and support projects from the early stages. This kind of information can mostly be found on the main page of the project. Watch out for well-known VCs like Blockchain Capital or Fenbushi (belongs to Ethereum founder Vitalik Buterin).
Next to code, some other useful information can be extracted from a Github page. Github gathers statistics about each project. The “Insights” tab gives you a graph of the activity, measured in code additions (~ commits), and shows you all the contributors with their contribution count. Ultimately, developers can award stars to meaningful projects they admire. The higher amount of stars a project is awarded, the more likely it is that the community likes the project.
Another important aspect of an ICO is the use of a limited cap, called a hard cap. A limited cap implies that there is a maximum for raising funds. An unlimited cap has no restrictions like the earlier mentioned Tezos ICO which acquired an astonishing $232 million. A hard cap leaves some hype for the secondary market and usually works well for investors. Also, keep in mind that a project needs to raise the amount needed for its development, marketing costs, etc.
The Bottom Line
ICOs are part of the crypto community. It’s even become a mainstream tool for fundraising. It is vital to investigate and read as much information about an ICO before making an investment decision. For us, the most critical element is creating an environment of trust and openness.