ICO Investments have become risky. 10 things to check before investing –Part I
- Varun Shah
The pace at which business application of technology is evolving, it has become difficult to tell whether technology is reinforcing business or is it the other way round. Every time the world begins to settle at an equilibrium of business and technology, something disruptive emerges. This time it could be the ICOs or Initial Coin Offerings which might lead to a spiked increase in the number of new startup ventures, the emergence of new business models and fostering of innovation through technology-driven financing. And we say this because business financing is still a major obstacle for startups and these newbie entities lead by tech-savvy entrepreneurs of the modern generation are unlikely to shy away from technology if it can help them legitimately source the capital required to finance their startup projects.
What is ICO?
Initial Coin Offering (ICO) is an unregulated method of raising funds via the use of cryptocurrencies. Since it is unregulated, business entities can bypass the stringent capital funding procedures which is the case with regulated financial markets (1) or even with raising loans from the banks.
Secondly, raising funds through ICOs can be efficient in terms of time and cost. Thirdly, ICOs can be offered to a large number of potential investors across the globe through the internet. All of these serve as an incentive for many entrepreneurs and business entities to go for ICO to raise capital funds for their businesses. But there are several considerations involved in taking the ICO route for both startup/business entities and potential investors.
How ICO works?
Briefly speaking, in an ICO, a business entity offers to sell a new form of cryptocurrency at a discount (token) to the potential investors.
Investors can purchase the newly issued cryptocurrency by using legal tender or other cryptocurrencies like Bitcoin (2).
For investors, their return on an ICO investment depends on the quantum of change (appreciation or depreciation) in the value of the newly issued cryptocurrency in question (3).
10 Things to check before investing
Legal Status of ICOs
The first and foremost priority for the investors should be to check and consider the legal status of the cryptocurrencies, crypto-tokens, ICOs, investment in ICOs etc in their respective countries/regions.
For example, China and South Korea have banned ICOs (4). Only fewer countries have issued preliminary guidelines for the ICOs or are in the process of regulating ICOs (2). Most of the countries have adopted a cautious approach towards ICOs.
Purpose of the project
It is very important for the investors to learn and be aware of the project(s) which are going to be funded with their ICO investments.
This involves careful study and analysis of the ICO whitepaper which is created and published by business entities intending to raise funds through ICOs.
The accessibility, transparency, authenticity, and credibility of the ICO whitepaper in question and the information contained in it are of paramount importance. This knowledge and awareness could prove to be immensely helpful for the investors to remain vigil and guard themselves against falling prey to scams.
Input Sources: (5)
Background check
Interested investors must conduct a thorough background check of the business entity making an ICO.
This may include information (pertaining to the business entity and the project) such as the registered office, project location(s), areas of operation, core operations and sources of revenue, financial reports, regulatory licensing, industry accreditations, financial and credit ratings, history and past performances, ongoing and future projects, technological resources available, media and public relations etc.
Investors may use other parameters as considered necessary by them. Again, the accessibility, transparency, authenticity, and credibility of this information is a crucial factor.
Core Team
While considering an ICO investment, investors should know into whose hands they are entrusting their investment.
Who are the people, the owners, the business leaders, the team and the management body behind a business entity or a project? Relevant education, experience, skills, expertise and competencies of the core team is vital to the success of a project or for the overall success of a business venture.
Digital security
Blockchain technology has emerged as a powerful platform for decentralized and distributed digital record management with enhanced digital security. One of the most apparent applications of blockchain technology has been in the field of digital currencies. The risk exposure to cyber threats like DDoS, data manipulation, and data and identity theft mitigates in the blockchain platform.
Investors should also look out for the SSL certificate of the company’s website when they happen to visit the same. Green activated padlock in the left side of the address bar on the browser window indicates that the browser connection to the server is secure.
Investors can also check in whose name the SSL certificate was issued. In short, SSL certificates bind a domain name, server name or hostname with an institutional identity (e.g. company name and location).
Input Sources: (6), (7), (8), (9)
ICOs and cryptocurrencies hold immense potential to foster entrepreneurship and fuel business projects but at the same time, these technologies and platforms also need to be brought under regulation towards ensuring more certainty, trust, control, and ease of doing business. Regulating ICOs and cryptocurrencies will also safeguard the interests of the stakeholders involved.
To be continued…………………
Disclaimer: The above content/publication is intended only to provide a general overview and is not to be used as a basis for exercise of any business or professional judgment.
To read read more article related to this topic: Can a checklist help in deciding which ICO’s to invest in?, Why will you remain an unsuccessful entrepreneur if you do not get organized?, Rise of AI & BOTs, Identifying the opportunity and bagging it at the right time, is a key success factor for entrepreneurs
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