By now, the cryptocurrency frenzy has attracted the attention of almost everyone. These days, even the non-tech-savvy masses have a rough knowledge of what Bitcoin is and what it’s potentially worth to investors. While cryptocurrencies have a lot in common with traditional, regulated stock markets, they also have some crucial differences. For those with a more advanced knowledge of cryptocurrencies, there are multiple speculative opportunities for investors. One such investment opportunity in Blockchain technology is the ICO, which is the crypto equivalent to an IPO.
What is an ICO?
Most of us know the term IPO, but let’s refresh for those who are not familiar. An IPO (Initial Public Offering) is the first time a private company goes public asking for funds, in exchange for a company-issued security (e.g. bonds, stocks). Similarly, in the cryptocurrencies environment, we have ICO (Initial Coin Offering), which serves the exact same function. Start-up companies seeking funds to finance their project can go directly to the public, without the interference of banks or venture capitals via an ICO. However, unlike the regulated stock market world, ICO investors do not get to own a part of the underlying company (as defined by the number of their stocks) and do not have voting privileges in the company. Instead, since they’re investing in a currency, what they get in return for their investment, is the coins themselves (so, Bitcoin or Ethereum, for example), which can be used for online transactions or for future investment.
What Types of ICOs Are there?
There are two instances when an ICO is likely to be executed: Right when a new cryptocurrency is launched, or when a start-up company is prepping for large growth and needs to raise funds quickly. The main advantage of an ICO over seeking venture capital is that there is no limitation on the eligible investors to an ICO, as everyone is allowed to participate.
How Big is the ICO Market?
As there are no financial institutions involved or regulations applied, an ICO can raise funds within minutes from anyone around the world. For this reason, speculators see ICOs as a great opportunity for large profits, in a short period of time. Funds raised from ICOs thus far exceed $2.3 billion, with $462 million in the first half of 2017 alone. During the same period, funds from venture capitals reached $295 million. An indicative figure about how fast an ICO can raise funds is the startup Brave that managed to collect $35 million in 30 seconds.
How safe is it investing in ICOs?
While legitimate projects widely use ICOs to raise funds, the lack of regulations in cryptocurrencies means there are unique risks involved. Research is required to ensure the startup is legit and serious. The ‘wild west’ nature of cryptocurrencies can be both good and bad for investment. Potential investors see ICOs as an incredible speculative opportunity, but it can be difficult to identify scams. There are no basic guidelines to identify the legitimacy of an ICO. You can, however, gauge a startup’s merit on the amount of legitimate third-party attention it receives—positive or negative. In cases where there isn’t adequate information about the structure, management, or mission statement of the new company, you should be warier. For instance, if chatrooms and forums are the only available source of information about the company and the investment opportunity, you need to be aware that opinions and reviews on these forums may be paid for by the company itself. Moreover, the magnitude of success of a new project may be inflated by a successful online marketing and SEO campaign. Contact the company itself. Find third-party information sources you trust. It is not safe to judge a startup’s merit based on how it appears in a forum or in the company’s own ad copy.
With the current state of flux that characterizes cryptocurrencies, fortunes can be made within days. These fast gains will continue to attract more people to ICOs. While no one knows which cryptos will survive, the revolutionary Blockchain technology is surely here to stay, which means ICOs are going to be important to the future of fundraising. In the absence of regulations around the ICOs, opportunities are great, but investors should be very cautious with their decisions for the time being. The absence of regulation is surely temporary, as governments around the world work to implement legal structures that will undoubtedly lead to transparency for potential ICO investors, similar to what is currently available for IPOs.