Should I Invest In An Initial Coin Offering?
Blockchain projects and start-ups open up a new world of opportunities for many cryptocurrency investors and venture capitalists. Initial coin offering allows investors to gain a decisive edge as pioneers and early adopters of new cryptocurrencies, and the latest applications and innovations in blockchain technology.
There’s a lot of success in recent Initial Coin Offerings (ICOs) of 2017, raising more than 3 billion USD in capital investments and token sales. (More about this later.) It became the latest buzz since Ethereum, and today we have more than 600 tokens created through these events — and counting.
However, ICOs recently came under fire and had been thoroughly scrutinized, or banned outright in some countries, due to their mostly unregulated status and reports of unsuspecting investors losing thousands, or even millions of dollars in ICO scams. In fact according to a report by the Wall Street Journal, around $300 million was money raised by coin offerings has gone to fraud or scams.
In this chapter, we’ll look at ICOs from a well-founded, and unbiased point of view, considering both pros and cons to help us come up with our own financial decisions whether or not to invest in them.
What are Initial Coin Offerings?
An initial coin offering is the stage or period in the development of a blockchain project where start-up companies or a group of people generate funds through crowdselling — a form of crowdfunding that issues tokens to contributors. Upon completion, creators and organizers of an ICO would launch the project (cryptocurrency, blockchain app, platform, etc.) and distribute tokens to all its participants. Some ICOs have their tokens already listed and traded in exchanges before the network launch to stimulate hype and move its value up through market price actions (e.g., EOS).
Some investors and regulators compare ICOs to initial public offerings (IPOs) because they’re both used to generate funds by issuing financial instruments tradable in a public exchange. However, such reference is made irrespective of the time of their execution.
Unlike IPOS, most ICOs are done when start-up companies have yet to prove themselves, and there’s nothing to back their claims except for several pages of whitepaper outlining their business model or concept. Participants usually buy indirectly through the ICO’s website and receive their tokens at a specified distribution date.
IPOs, on the other hand, are done on a public exchange, after companies have long been established and have already proven their worth. The main goal of an IPO is to raise capital to support its operations and to grow the company on a massive scale.
The financial instruments issued by ICOs and IPOs may also be classified as securities, but they may not exactly be of the same type. Tokens sold prior to, or within an ICO period are considered IOUs or (loosely) bonds with a set face value. After a successful launch, tokens are issued to all the participants, at which point, they may no longer be considered IOUs or bonds, but more like shares in an IPO where their value is determined by the market. But the main purpose of ICOs and IPOs from an investor’s point of view is essentially the same.
Currently, there are no fixed regulations about ICOs. However, there are a few who perform KYC on their contributors. It’s the mostly unregulated status of ICOs that make investing in these blockchain-based ventures extremely high-risk. But on a positive note, they can also be extremely profitable by as much as tenfold compared to other markets. In contrast, IPOs are highly regulated and closely monitored by authorities to protect the rights of investors. Certified investors in an IPO must also meet certain qualifications before they can be allowed to invest on a stock.
ICOs typically last for several weeks and may consist of token sale “rounds.” Prices of tokens increase in value with every round. Some ICOs run for months and had their tokens already listed on exchanges before the project launches. There’s also a pre-sale or pre-ICO where tokens are sold at wholesale prices to institutional investors and some small investors to jumpstart the project. Some pre-ICOs offer perks and exclusive bonuses to early adopters.
ICOs can be a great way to raise funds, and not just for companies looking to create a new cryptocurrency. Anybody from traditional companies, tech companies, and even Venezuela is getting in on the act. However, the United States is trying to block American citizens from purchasing the digital currency issued by Venezuela which, according to President Nicolas Maduro, raised $5 Billion.
In fact, ICOs have become a new mode of crowdfunding, blending investment returns with the possibility of an actual physical product. Indiegogo, the crowdfunding platform is testing out a new product where you can invest in ICOs and blockchain. The first ICO they helped sell tokens for was called The Fan-Controlled Football League, a fantasy-style league which lets the football audience decide everything in real time. They are selling up to $5 million worth of tokens.