We have received many criticisms as well as useful comments since posting articles on LinkedIn. A question often crops up is, what is an ICO implication to new investors and why its price could not be justified compared to an IPO. An IPO price is best ascertained using an IPO company’s net profit, price to earnings ratio, a PE multiplier, and its balance sheet.
For traditional companies, there are several ways of raising funds crucial for development and expansion. A company can gradually grow as its profits allow, bound only to company owners that have the patience for funds to build up.
An alternate way is companies can source for outside investment for early support, providing the companies a quick inflow of cash, however the setback is that these companies have to give away ownership stake. Another common method is companies can go to a capital market, and acquire funds from investors and banks by selling shares through an Initial Public Offering (IPO).
An Initial Coin Offering (ICO) is the equivalent to an IPO within the cryptocurrency sphere. ICOs act as fundraisers; an aspiring company that creates an original coin, an inventive app, or an innovative service launches an ICO. Next, potential investors buy into the offering, either with fiat currency (US$) or with pre-existing digital currency like Bitcoin. In exchange for their support, investors receive a new digital token from the ICO issuers. Investors now hope that the token will appreciate in value in the future, with a bigger return on investment. The company holding the ICO then uses funds raised to fulfil its goals, by launching its product or starting its digital currency. ICOs are used by start-ups to circumvent the rigorous and regulated capital-raising process required by investment banks.
Breaking down Initial Coin Offering (ICO)
Indeed, just as ICOs have expeditiously come to grasp attention in the cryptocurrency and blockchains space, they have also brought along challenges, dangers, and unexpected opportunities. Investors buy into them in the hope of quick and fruitful returns on their investments. The most successful ICOs in the past have given investors reason to maintain this hope. Considering ICOs are mostly unregulated, ICOs have become a hotbed for frauds and scams looking to prey on investors who are overzealous and under-informed.
One should consider a few aspects when assessing blockchain network values, ICO market capitalization, and token prices. Price alone is just a number and often cannot determine the full value.
A new coin that trades for $0.50 does not automatically make it a better deal than one trading for $5. We cannot assume that a $100 million ICO raise is better than a $10 million ICO raise. There are fundamental differences between these two ICOs, and this difference is what will determine the ICO’s success.
Over the last two years, many cryptocurrencies are going mainstream. From Jan 2018 to Sep 2018, approximately US$18 billion have been raised thus far with a fair amount of ICOs with an offer price ranging from US$0.10 to US$1. A growing number of retail investors and traders have since joined this bandwagon and argue that a low price offering will double or triple their investments. Often than not, several of these ICOs prices tanked, and they blame the system and the ICO issuers. These new market players continue to display this herd behaviour and continue to bolster their basic methods of valuing blockchain networks, ICO market capitalization, and pricing of related coins/tokens.
Calling out prices alone do not determine if a particular token is “cheap” or “expensive” or that the token will appreciate 5x,10x or 20x in future values. Value is illusory, and one should not expect the ICOs’ owner to issue token for pennies and expect the market to bring up its price. Besides, the amount of money a project raises during an ICO does not automatically give it either a lofty nor a depressed market capitalization.
One must deal with the many factors that are captured in the ICO, including the number of coins mined, total coins in circulation, token economies, token design, token utility, market size, project scope, the new idea, the team drivers, technology, risk profile, and regulatory environment.
It is imperative to find out more information about the project and the people involved to derive the value of the token being offered by that project. Investigate what the money raised in an ICO will be used for, who are the decision makers and are they capable of delivering the project milestones, and what are the costs associated with the problems being addressed. And finally, what is the utility of the token?
To illustrate, a $100,000 is too much for a car without knowing what kind of car and its specifications, but could very well fall short of the price tag of a luxury vehicle. The key here is in the scope of product offerings and the delivery of its intended promises.
Therefore, a small team that is building a single-purpose decentralized application, and raising $30 million to tackle a niche use case, may have set a high capitalization of their needs. Comparatively, a different project that raises that same amount and serving a $100 billion market could be treated to have an appropriate small cap. A token that is selling for $6 with an intrinsic value, with 20 million coins in circulation would give that project a $120 million network value. The question to ask is whether this network value makes sense, basing on the size and scope of the project.
Network value is the number of free coins in distribution multiplied by the coin spot-rate trading price on crypto exchanges and network value can also mean the market capitalization (market cap) of the project. Understanding a token amount, its market cap or network value and pre/post ICO cap is essential for smart investing in the long run.
In summary, when an investor tries to predict the crypto assets future performance, utility token future price, and the ICO future market cap are undoubtedly an imperfect science. Do not assess prices based on recommendations. With crypto assets, always see the big picture and consider all factors that may affect the cost of a particular token and its long-term potential.
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