ICOs Simplified: How New Investors Can Get Into ICOs

In recent months, initial coin offerings or ICOs have been in the crosshairs of regulators nearly everywhere. ICOs have been outlawed in China and South Korea, they are increasingly being considered to be securities, and the SEC chair has indicated that utility tokens may be securities, despite their structuring. 

Despite this, there is no indication of there being a cool-down on ICO investing. To date, ICOs raised more than $5.68 billion, with December 2017 seeing the most new ICO funding in a single month. This is more than what has been raised in early-stage venture capital funding.

In light of this, should someone invest in an ICO?

Why Do ICOs Exist?

Altcoins are designed to be anti-banks. As decentralized stores of value, altcoins are peer-to-peer wealth transfer devices meant to be independent of any centralized institution. Altcoins are the tokenized messaging devices that are used to interface with a blockchain-based project that is either privately-held or managed by a public group.

Starting these projects may require seed funding, and the novelty and anti-bank mentality of altcoins make such projects unattractive to banks. Additionally, with most of these projects being theoretical without a proof-of-concept backing them, it is difficult to sell them to venture capitalists, who may be looking for a bigger project with better investor protections in which to invest.

A way around this is an initial coin offering, where the issuing company of a future altcoin offers a first-chance crowd-sale of the new altcoin in order to secure investors in the project. The coin does not necessarily convey ownership or equity in the project, and it does not give the investor a direct stake in the project's future performance. What the coin does offer is access to whatever service the project offers and, potentially, an asset that can be traded after the ICO on the coin exchanges.

This last point is important, as some of the best performing altcoins have seen price increases in excess of 100,000 percent over their lifetimes. This level of performance has minted a new class of altcoin millionaires and billionaires.

The project gets access to funding without the need to submit to the due diligence required for an initial public offering (IPO). This lack of legal and financial compliance means that ICOs are - for now - fully unregulated. This is good for the project manager, as there is no significant barrier to raising funds with an ICO. This is also bad for the investor, as all the risk regulators defray with due diligence is now squarely placed on the investor.

Why Would You Invest in an ICO?

As stated before, ICOs are high-risk instruments. The potential of such instruments means that these investment options can have extreme returns on investment. For example, Ethereum - arguably the first ICO, launched in 2014 - started from a coin price of $0.30 to a high of over $1,000.

The risk involved in ICO investing is multi-faceted. It includes:

• Operational risk. The more blockchains and platforms you have to keep track of, the harder it is to manage the different wallets, keys, passwords, and protocols. It does not take much to make a mistake that leads to an uncorrectable loss of capital.
• Fraud risk. The lack of regulatory due diligence means it is relatively easy for shady actors to create fraudulent ICOs. An impressive whitepaper may reflect nothing more than a scam waiting to happen, with the scammers intending to disappear once the crowd-sale concludes. 
• Market risk. It is possible that the project's planners may overreach and promise a project which they cannot deliver. Once the project fails, the coin will devalue, bleeding off any value your investment may have. 
• Regulatory risk. As stated above, there is always the potential of regulators cracking down on ICOs. Should this happen, your investment could disappear overnight, as well as most of the coin market.

The choice to invest in ICOs is yours. Be aware that in high risk investing, you must be prepared to lose your entire investment. So, invest only what you can afford to lose and do your due diligence. Please check out our Steemit article on how to evaluate an ICO for more information on this important topic.

If you are interested in investing in an ICO, click here for our complete list of Upcoming ICOs, which is updated regularly and contains valuable information you need to begin your research.