Initial Coin Offerings (ICO) are investment periods in the early stages of a blockchain start-ups development. Much like an Initial Public Offering (IPO) in the stock markets, ICOs promise specific portions of coins for those looking to contribute financially. This is a common method for raising capital to finish a product or launch a new service, and can give a business the boost it needs to come to market. ICOs often run in stages, a pre-sale period is an invitation for large investors and usually runs before the public sale, where smaller speculators can buy in.
Anyone can start an ICO. Legal requirements and regulations haven’t been established in most countries, and there are no insurance policies against fraudulent claims. As such, the need for research is crucial for those looking to invest in a company at the ICO stage. The aim is to find a product or service with high demand, backed by a solid business plan and talented team. Even then, luck plays a strong role. A large percentage of companies, all offering exciting products in their white papers, fail to launch a sustainable enterprise. With hundreds of ICOs being announced every month, a brand must have or do something special to get noticed. Many will rely on hype-based marketing, stirring up the emotions of their communities into an excited fervor. Some will be out-right scams.
For these reasons, China, South Korea and the United States have either banned out-right or put strict limitations on who can participate in an ICO. In September 2017, China and South Korea banned ICO investment in order to regulate the amount of fiat money flowing into the blockchain market. In the US, an ICO must be compliant with financial securities regulations, which differ across all 50 states. For most businesses, the cost of paperwork involved in filing with each state is enough to deter any offerings, not to mention the legal and litigious ramifications of failing to adhere to so many statutes. Not many reputable companies are willing to take those risks. So if you are a resident in the US, China or South Korea, getting access to an ICO requires skirting the legal process, and the business you invest in may deny your contributions.
Regardless, doing some research on a cryptocurrency before it officially comes to market is a good investment strategy. Getting to know the platform and players will give you a better sense of how they will perform once the ICO is finished. The operation of the ICO can also give you clues as to how successful they will be as a business. Many offerings have been held up or canceled entirely due to financial issues or development problems. There are measures to be applied to any ICO to determine whether the company has longevity.
Platforms and Products
According to Ian Balina, a big-data analyst, 90 percent of the most successful ICOs had a product customers could use. Having a live beta version of the software or prototype ensures the company offering the ICO isn’t simply promoting an idea. White paper ICOs – offerings based on plans and roadmaps, rather than products – have the highest rate of failure. If a company hasn’t released a product by the time they need investment, it’s usually a good sign to steer clear.
The valuation of a coin is directly related to how many are minted. If a company wants to issue 100 billion coins, the price of each coin will be lower than if it decides to only mint 100 million. During an ICO, a portion of the total amount is offered to investors. This incentive has risks. If the company doesn’t offer enough to speculators, fewer will invest and they might not make the funding goal. If too many coins are distributed on initial offering, the decentralized aspect of the blockchain is thwarted by a small number of individuals controlling a large percentage of the supply. An equilibrium must be found between the wants of investors and the needs of the company.
Another problem that arises from ICO investment, is a risk of “pump and dump.” This is a trading term for when high-volume holders advertise and promote a product to increase its price. Then, after the return on investment is high enough, they sell all their shares. In this way, these large investors make massive sums of money, at the expense of the economic foundation of the asset. This can typically be avoided by enacting a maturation date or lock-up period of six-months to a year.
Disruption or First Mover
A central issue raised by the Satoshi Nakamoto white paper was the disruption and replacement of established systems using blockchain technology. Since the physical commodity and service markets are well saturated, and have dominant well-known players, building a new company in an existing sector can be challenging. Because there are so many competitors, a business must take every opportunity to differentiate themselves. The blockchain provides new opportunities for the businesses that can seize them. Smart contracts give an advantage to companies that opt to use a decentralized system for secure digital processes. These qualities of the burgeoning crypto-space, are disrupting a wider spectrum of market sectors.
Ford Motor company were the first automotive factories to build cars in an assembly line fashion. Henry Ford also adopted a replacement-part model for his new vehicles. These changes were mocked by Fords competitors, but the rapidity and efficiency of Ford factories soon put the others out of business. Now, all auto manufacturers use some form of the Ford assembly line to build their cars. If crypto-entrepreneurs that can integrate an existing idea onto the blockchain before anyone else, can get “first mover advantage” and, in the same way as Henry Ford, change the shape of the market.
A high-profile team is often a good sign of success. If there are members who were involved in other profitable ventures, or are well-known in their industry, it is likely that success and reputation will follow them to the project. Having big-named advisers in the roster can also play an important role. However, some ICOs fail to attract investors, even when backed by notable figures.