The potential earnings from investing in a successful ICO can be enormous. High gains attract speculators who may or may not make educated decisions before investing. Making an ICO investment without first doing your homework is a mistake. For the very same reason, ICOs offer such high potential gains, the risk of losses is also exceptionally high. Unlike regulated stock markets, digital currency is a realm of uncharted waters, and these waters can be stormy. For this reason, it is all the more important that investors are aware of the risks involved in ICO investment.
The very public success of several recent ICOs, which outperformed expectations and led to insane gains for investors, has created a strong motive to take the ICO risk.
Here are a couple examples:
- NXT, which launched in November 2013 and had a start price of $0.0000168 during its Initial Coin Offering, is being traded at $0.6790 at the moment. In other words, it has delivered a staggering ROI of 40,417,619%.
- IOTA, which opened at $0.001 during its ICO in 2015, represents an ROI of 377,000% while being traded publicly at 3.77% as of publication of this article.
More than 200 ICOs hit the market in 2017. While many credible companies with genuinely innovative projects seek crowdfunding via ICOs to initiate their operations, scams can also be hidden behind ICOs. The popularity of ICOs has attracted the attention of the Securities and Exchange Commission, which has led to regulations that will soon to be applied to ICOs executed in the US. At the same time, ICOs were banned in countries like South Korea and China, where the majority of cryptocurrency transactions originated. Startups, in an effort to show legitimacy and credibility, share their (often dubious) white papers, open codes, and roadmaps publicly. To bypass the aforementioned restrictions, many startups are being incorporated in lawless, offshore locations to enable the participation of investors even from the countries where the ban is in effect (US citizens excluded) during the token sale.
Beware the Hollow Business
Since a new technology (Blockchain) is the backbone of cryptocurrency projects, investors may not realize the risk they are taking, due to a lack of technical knowledge. Differentiating between a sound business plan and the ramblings of a charlatan can, therefore, be a bit more difficult. Just as the insane volatility of the cryptocurrencies market enables investors to generate tremendous profits within a few hours or days, losses can be equally significant as the profits. It is safe to say that more than 50% of the ICOs out there look suspicious. Background checks are essential to ensure the fundamental legitimacy of a company.
Beware Security Weaknesses
Security is also a key consideration, as ICOs have been a subject of hacking in the past. Seven million dollars were redirected to a fake Ethereum address last July, during the CoinDash token sale. The company stopped the procedure and eventually returned the lost tokens to the victims of the scam, but failed to collect their $12 million target. The DAO, a revolutionary and decentralized Blockchain fund saw $50 million disappear through a DAO clone system, during their ICO in 2016. As a result, the Ethereum Blockchain had to be hard-forked (hacked) to prevent the attacker from gaining access to the remaining $150 million on virtual wallets. The DAO case raised a big question mark above Blockchain and its well-marketed transparency.
The security of centralized digital wallets (Poloniex, Kraken) has also been breached in the past. Therefore, a good suggestion for the storage of your digital assets would be to keep them in a private wallet offline, either on a dedicated offline computer or on a hardware wallet.
Past Scams behind ICOs
Confido is a recent example of a startup that promised to offer smart contracts, managed to raise $375,000 last November, and disappeared a few days later. All their social media accounts have been deleted and Joost van Doorn, Confido’s CEO is untraceable.
PayCoin and GAW Miners were managed by Homero Josh Garza, who is accused by the SEC for operating a Ponzi scheme by selling a variety of products for mining and contracts to 10,000 investors.
Other scams seizing the opportunity to benefit from the Blockchain revolution, would include Opair, Bitcad, and Authorship. Finally, as has been widely publicized, numerous cryptocurrency exchanges have been accused by authorities to be vehicles for money laundering. As regulations and government involvement in the crypto world ramp up, it would be smart for any potential investor to ensure the ICO of interest has a solid anti-money-laundering strategy and policy.
What to Research when Investing in ICOs
To mitigate risk, investors should always try to gather as much information as possible through all available sources.
Here are some questions to ask:
- Who are the members of the team? Search their social media profiles, LinkedIn, and online profiles to find details about their work and business experience.
- Is what they offer unique? Is their product/service really innovative? Does it add real, tangible value?
- How big is their community? How big is their presence on social media platforms - Useful conversations between the team members and potential investors can be found in related forums and chatrooms.
- Who else supports the project? Legitimate and promising entrepreneurial activities are often backed by serious venture capitals from their early stages.
- What is their roadmap? Are their long-term goals clear? How sound do they look?
- How good is their code? If you have the necessary knowledge, going through the details of the code on GitHub can provide you with useful insights about the quality and experience of the development team.
What we can’t emphasize enough is this: While getting in on the ground floor is key to maximizing profit when investing in a new company, choosing the right place for your money must involve a sober, informed decision-making process where you conduct thorough research into the security and viability of the venture.