ICO Investing 101 — Everything You Need to Know

uhub (25)in #bitcoin • 9 years ago

The exciting world of cryptocurrencies has started to attract a lot of attention lately and for a good reason. Bitcoin price skyrocketed to all times high (over $7,000 per Bitcoin), increasing the price for more than 700% from the beginning of the year. This climb started a new gold rush, as everyone is trying to get a piece of the cake.

Understandably, strong public interest has led to massive growth of the digital currency market (recently Coinbase got more than 100,000 new users in just a day). With the total market cap of $200 billion and over 900 different cryptocurrencies, the crypto market has become the fastest growing market in history.

But who funded the development of all these digital currencies? In the majority of cases, the answer is — Initial Coin Offering (ICO).

ICOs Explained

An ICO is a way of raising funds through the sale of coins or tokens, which are to some extent similar to shares of a company. The tokens are usually exchanged for other digital currencies, usually Bitcoin or Ethereum. Since the success of ICO held by Ethereum Foundation, ICOs became the preferred method for funding the development of new cryptocurrency projects.

Typically, the team behind the ICO sets a minimum funding goal for the fundraiser and a deadline for reaching that goal. If the goal is met before the deadline, the funds are used to fuel the project development, and the developers can distribute tokens to investors. Tokens can be traded on the cryptocurrency exchanges, such as Bittrex or Poloniex.
Numerous experts in the crypto community agree that ICO is a long-awaited solution for raising funds by non-profit foundations, especially if they are planning to build open-source software. This was the case with now-famous Ethereum ICO. They wanted to build a decentralized application platform based on blockchain technology, and they wanted it to be open source.

Ethereum raised $18 million in its 2014 crowdsale, the largest-ever at the time. Since the project came to life, the price of Ether (cryptocurrency used by Ethereum platform) has increased drastically — from $0.4 (ICO price) to over $300 at the time of writing. This price growth has made a fortune for the early investors, fueling the ICO market.
The main characteristics of an ICO include:

Typically ICO involves the creation of a predefined number of tokens or coins before the public sale.
Tokens usually sell a right to ownership or royalties to a project, while Coins sell participation in the market.
Owning tokens does not necessarily give the investors a right to vote on the crucial project decisions, but generally, the investor will have input throughout a project’s lifespan.
ICO prices are usually set by the developers of the project or economy.
ICO can have multiple rounds of fundraising, with tokens or coins offered increasing in value until the release date, allowing early investors to get greater rewards as an incentive.
ICO is finished once the coin or token can be traded on the open market.

History of ICOs

The first ICO ever was held by Mastercoin back in 2013, and successfully raised approximately 10,000 Bitcoins, worth around $1 million at the time. The project aimed to create a Bitcoin exchange. Early investors made tremendous gains, driving the ICO hype. Later Mastercoin merged with Counterparty and Omni, two coins with a similar purpose.

After Mastercoin, Ripple was created as a fast and cheap way for money transfers. The company sold 100 billion Ripple tokens to raise money for the development of the platform.

After these two, ICO held by Next closely followed Mastercoin and Ripple, selling over 1 billion tokens to early investors. But, the ICO barely raised a double-digit amount of Bitcoin. Nowadays, the NXT token is worth way more, and Next has become a stable and reasonably prosperous cryptocurrency.

Investing in ICOs

A blind investment in every token sale to this date, including those who have failed, would have earned the investor a profit of 1,320% profit, says a new report from Mangrove.

Mangrove Capitals Partners, a venture capital firm, recently released a report that states the following:

If one had blindly invested 10,000€ in every ICO, including the significant number of ICOs that failed, this would have delivered a +13.2x return.

According to the statistics on CoinSchedule, there were over 200 ICOs so far this year. Those ICOs have gathered a combined $3.2 billion, with over $800 million of that sum coming from ICOs finished during September.

The crowdsale champion remains Filecoin with $257 million raised, while the Tezos holds the second place with $232 million worth of cryptocurrencies raised. Altogether, the top 10 ICOs in 2017 have gathered a combined sum of $1.2 billion, so far. However, these highly impressive numbers could be soon outrun by the tZERO ICO, which Overstock chief executive Patrick Byrne predicts will “raise a fortune,” aiming at $500 million — or more.

The Negative Sides of ICOs

Besides the positives, there are also some negative sides to be aware of when it comes to crowdfunding.
Many token sales were a failure. There were many copycat projects or developers simply failed to deliver (not just what they promised, but anything at all), bringing the price of their tokens and coins to zero. A lack of regulation tends to leave investors and other participants open to Ponzi schemes and other scams.

While ICO regulation is starting to appear on the market, the question imposes itself — is this another investment bubble, like the one we had in Spring 2017 with cryptocurrencies? The skeptics have been on alert since the Global Financial Crisis ten years ago, labeling even Bitcoin as a bubble waiting to burst.

On the other hand, the reality is totally different. ICOs have proven their worth, as they helped bring many great projects to life, earning nice profits for investors along the way.

What are your thoughts about ICOs? Post them in the comments; we would love to hear from you.