ICO projects are gaining more and more traction among startups these days. They create new promising tokens which attract millions of dollars in investments. A lot of people buy tokens in hopes of earning future profits and simultaneously acting as investors. However, there is always a looming possibility of the project being closed and investors risking losing the tokens they bought.
An IPO, or initial public offering, remains a popular option. A company can sell bonds and shares via stock exchanges and earn a revenue that is typically significantly higher than the annual revenues. However, an IPO is a high-profile method of raising investment. Getting it ready requires a lot of time and money. It is not an easy option for investors either as investment volume must be significant in order to participate. As a result, only big companies are able to participate in the IPO and buy shares.
The modern cryptocurrency market has introduced the concept of ICO – initial coin offering – which is similar to the IPO. A company seeking to raise investment issues digital coins, aka tokens, as opposed to the regular shares. Investors who purchased these tokens can spend them in a variety of ways: pay for the purchases or services within the platform or wait for the price of these tokens to grow in order to exchange them for other cryptocurrencies or fiat currencies.
An ICO is associated with token emission so it is important that the company that issues tokens works with the blockchain technology. Such projects are often launched by the fintech startups whose end product is only visualized but hasn’t been executed yet. However, even if the company has nothing to do with IT, it is still possible for it to launch an ICO. The important thing in this case is to come up with a way to implement its product on blockchain. The latter was created to simplify various modern experiences. Here is a simple example of such implementation: a farm can design an online platform to sell its products for tokens and offer some particularly favorable terms.
An IPO suggests that investors purchase their stake in the company. It means that they will become co-owners of a large company. On the contrary, those who invest in the ICO get project coins. As for the legal terms of the ICO, they are not explicitly defined yet and people investing in the ICOs are in no way protected in case of project failure. There exist cases of startups raising money, yet not delivering the product they claimed to create. At this point, cryptocurrency industry is a proverbial Wild West where quite different rules apply.
Before investing significant funds in any project, one needs to study it thoroughly. With the ICO, it is possible to invest small amounts as the cost of one token can equal just a few cents.
Another important feature of the ICO is that anyone with a cryptowallet can invest. Investors add funds to the wallet, then wait for the token sale. Tokens can be bought in a few clicks.
Additionally, there is a thing called pre-ICO. Companies do not always take this step but sometimes they can have a private pre-sale. At this stage, the price of tokens is even lower but the risks of buying them are higher. The funds the company raises during pre-ICO are usually used to finance the development of a beta version of the final design.
Blockchain enables startups to raise money for their projects without having to sell a part of the company. However, the ICO market is in its nascent stage just yet and the legal terms are not yet set forth explicitly, which fraudsters sometimes take advantage of.
How to join the ICO?
As a rule, large ICOs use the Ethereum platform which is why investments are raised in ETH. This means that you must either buy ethers or exchange the cryptocurrency you already own for ethers. Next, you need to transfer ethers to a wallet which supports ERC20 tokens, for example Parity or MoneeBot.
In the foreseeable future, users will be able to buy ethers directly with the help of a bot. This will allow to skip the step of converting other cryptocurrencies via the exchange and paying an additional commission.
Once the ICO launch is announced, you will find the ETH address to which you can send funds on the project’s website. Decide on the amount you want to invest and conduct a transaction. After that, as per the terms of the smart contract, you will receive the project tokens to your wallet (which must support ERC20).
A smart contract is a computer protocol that executes transactions independently based on mathematical algorithms. The main advantages of using a smart contract are a high transaction speed and elimination of the third parties. Tokens that were transferred to you after you have invested can be stored in your wallet. You can also send them to other people or list them on the stock exchange to sell.
If you are going to sell the tokens, you should determine the exchange service through which you will do it because certain tokens are supported by a limited number of exchanges. In addition, there are tokens that can only be used within the project. It is better to find these things out before buying tokens to avoid misunderstanding.
Here are a few useful services when working with tokens:
ICOSTATS which tracks the token growth in value after the ICO;
ICO Rating which lists the main parameters of different ICOs;
ICO calendar which reminds of the launch of different ICOs.
How to choose the right ICO?
Investing in ICO entails not only a prospect of large profits but a considerable risk of losing your money as well. The token sale is similar to the venture market where investors expect a 30- to 40-times growth of a startup, yet the reality does not always live up to their expectations.
At the ICO stage, startups rarely have a specific product already developed. Most simply have an idea, a technical solution and a visual representation. The companies are still in the process of searching for professional staff and potential customers. They are hoping for an initial round of venture investments. In this market, this is the riskiest stage. Statistics show that 5 of 10 projects fail to provide returns to investors, 3 or 4 earn a small income and only 1 or 2 yield returns that significantly exceed the investment.
ICO and the initial round of investments have both similarities and differences.
Considerable risks associated with the ICO stem from the fact that the number of investments can be much larger than for the initial rounds of investments. However, investor guarantees are feeble. At the same time, tokens offer advantages of their own – they can deliver revenue much faster.
Many people wonder which ICOs they should invest in.
To avoid mistakes while choosing a project, you need to answer the following question:
Why would the price of this token grow and what objective potential does it have to be valued higher?
In this case, you cannot rely on traditional financial analysis because:
- at its initial stages, the project does not have any performance indicators so it is impossible to determine its price;
- a token is not a specific part of the company, rather, its value is shaped by market demand and supply.
So how to assess the prospective growth of the price of a particular token?
One must analyze the project. To do so, it must be broken down into sections which are to be evaluated independently. This approach helps identify the strengths and weaknesses of a startup as well as its development potential.
The main factors to take into account when analyzing the project are:
Market that determines the value and development potential of a startup. Ideally, the market should be unique and offer a huge development potential. The competition should be insignificant or non-existent. The probability of the startup capturing a significant market share must be high;
Product. The idea is subjectively evaluated in terms of its value and potential. Ideally, the product should be unique, applicable to blockchain and with an open source code. The product should address market problems and its technical side should be described in the white paper. It is important that by the time the product is released, the market is ready for it. Other projects’ issues with blockchain adoption should not affect its performance. Consult with the experts to discover if they see prospects and value in the end product;
The role of the token. This is an important factor that shapes profitability. At present, it is quite difficult to come up with the best token model. At any rate, it must be operational and the demand for it must increase as the project moves forward;
Achievements. This will help discover the main goal of the development team: to release a new product or earn funds for the ICO as well as whether the project can be implemented without major investment. Prominent achievements prior to the ICO reduce the risks for investors;
Roadmap. One can predict market activity with its help. Once the key stages are completed, the price of the token should go up. Ideally, the roadmap should have a detailed description of the stages of the project's growth together with a financial information. This approach indicates that the team knows how to achieve the goal;
Team. Seasoned investors pay particular attention to this factor because a good team will be able to radically change a product or create a new one, while a bad team can fail with a worthwhile idea. Ideally, the team should consist of professionals with experience in the field by the time the ICO is launched; blockchain developers; advisory board; experts specializing in business processes; CEO with significant managerial experience;
Terms of the ICO. The limits of the ICO, the conditions for its execution and peculiarities regarding the distribution of tokens are important to understand. There is no standard format for this and conditions vary. A lot depends on the crowd sale.
Let’s break down the factors that should be taken into account. The maximum and minimum cap that can be raised by the project corresponds to its scale. In other words, if a startup does not raise the minimum cap, all investments are returned to investors.
If fundraising is successful, the project will not receive funds beyond the maximum cap. It is a very good signal if the team is able to not only provide a direction in which the raised funds will be distributed, but also outline and explain the limits of the ICO campaign.
The ICO terms do not allow concentrating tokens amongst the largest players only. Tokens are distributed by the team. Developers receive only a small percentage which is, ideally, no more than 15%-20%. The team is not able to sell tokens within a long term.
Once the project is analyzed, it is important to determine the investment strategy. There are several options: sell digital coins as soon as they enter the exchanges or wait for them to grow in value over time. Both options make sense in case the investor has determined that the startup does have a potential. But the exact results may depend on different terms.
Here are the factors affecting the price growth once the tokens are released to the exchange:
- an insufficient number of coins to distribute them among all investors. The lack of tokens at the ICO stage increases the demand for them later on;
- most investors have faith in a startup. If investors estimate the potential of the startup to be sufficiently high, it has a good chance of growing in value;
- the company uses a smart marketing strategy. This contributes to the fact that more investors will learn about the startup and buy its tokens;
- digital coins do not immediately enter the exchange. A long silence after the ICO indicates a possible rapid increase in the price after the trading was launched. Here are the factors affecting the continued value growth:
- the team is active in social networks and shares its current and upcoming tasks;
- there are certain results in terms of implementing new opportunities and attracting partners;
- there is potential for development. Investors place a higher rating on the projects that are projected to grow significantly in the near future;
- the token is of a great importance and its potential is associated with the growth of the startup.
The above criteria can serve as control questions to make an objective decision whether it would pay off to invest in a particular project.