Initial Coin Offerings (ICO)
You may have heard about the term ICO in the media. From a technical point of view, it’s a way for cryptocurrencies creators to sell them investors. In fact, 95% of the ICOs offered at this time are dubious, or even fraudulent. But that will change as the market matures, investors learn from mistakes and space is regulated by the authorities. This is happening in all newly born industries. This is a good thing for more legitimate ICOs to come to market.
Meanwhile, if someone offers you an ICO tip, before you do your homework and check on what it is, suppose it’s bad to buy.
The probability is over 90% to be right. I read about a discussion between a founder and an investor who knows the cryptocurrencies space very well. The founder told the investor he would create a cryptocurrency and launch an ICO. With arguments, the investor explained to the founder that it does not make sense to have that cryptocurrency, given the nature of his business. The founder listened carefully and at the end he said: “You’re right, but why not do it. It’s free money. “
That’s what’s happening now in the ICO space. Any new business that needs money seeks to justify that the existence of a cryptocurrency theoretically would help to something with the business, clients, or partners. Then organize an ICO with strong marketing backwards knowing that now ICOs are seen as gold mines of naive investors.
In conclusion, a company can have a viable product, a good team, but not to justify it the existence of a new currency. In this case, the investment in ICO is bad and over time it will be zero. Many new companies would be unable to raise funds directly from investors (angels), but they do get millions of dollars through ICOs. Expect to see a bunch of news, or online ads about great ICO opportunities. When in doubt, then imagine they are bad. Do not give up to fear of missing the chance of your life if not investing in an ICO. Scammers count on this. And after you’ve invested your money (see the Onecoin example) you might not see them anymore.
Many ghost companies are registered in offshore and have obscure teams.
Like many online markets, people will become wiser and ICOs will get better and we will see many opportunities with potential. Meanwhile, be cautious! I’ve seen all kinds of promises. “200% returns in a week!” Yeah, sure. Technically it can happen. But there is no liquidity. Which means you can not sell to get any profit. The only ones who can sell are doing it with the excuses behind the ICO and those who buy remain with cryptocurrencies that are listed at high prices, but they can not escape.
Despite these things, there are legitimate ICOs, with performing teams with good leadership and with potential to create value for investors through their products. I will sign you to any ICO I detect and that meets my investment criteria. Maybe in a month I will find none, maybe in another month I will find more. But we’ll just invest in the truly valuable ones.
Remember that this is a new field, we have enough time to invest, but you have to to be disciplined and to have patience. This is the best way to create a great long-term fortune, especially in a new market and immature like cryptocurrencies.
ICOs have changed things.
Companies are creating cryptocurrencies (which is very easy on the Ethereum platform) and begin with the fundraising phase (similar to the crowdfunding model) before having one product. All they have is a paper (whitepaper) and a site where they write what a wonderful product they will do. Many teams have earned tens of millions of dollars on a whitepaper. Some of them have created the most valuable existing coins, and others have reached zero. That’s why it’s important to really understand ICO’s and how to choose just solid cryptocurrencies,with good technology-based concepts, in contrast to companies selling cryptocurrencies based on ideas that “catch on to the public,” but they never materialize in a product.
So… how do you participate in an ICO?
Usually, investors send bitcoin or ether to a digital address and receive the new created cryptocurrencies in return. They are called coins and or tokens (chips). They are the same thing: a type of cryptocurrencies. These can be traded or can be used in a particular network when the network is functional.
At first, anyone could participate. There were no rules. Some new cryptocurrencies are really valuable: for example Chinese NEO cryptocurrency. Others have failed. For example, Burger King in Russia has created WhopperCoin probably for marketing and advertising reasons, but failed miserably. In 2016, companies raised $102 million through ICOs. In 2017, the number exploded at $1.3 billion in the first 8 months.
ICOs are an easy way to earn money.
That has both good and also bad parts. For those who are creating something valuable and legitimate is good. Everybody has to win. But keep in mind that considering how easy it is to earn money, most are misleading. ICOs were thought to be available to anyone. All you have to do is send bitcoin to the address on a site and get the new cryptocurrencies. Then you can sell them, trade them, or use them in a network or platform. But there is a major problem. Projects with a good marketing have a simple way to fool people. Recently, the Wall Street Journal and Bloomberg have written a lot of articles about an ICO which is probably a great deception, but has a great marketing campaign. Lately, several countries have re-examined ICO space to impose some rules in order to protect investors. For example, the Philippines, Australia, Japan and others issue new rules such as data collection requirements to help prevent illegal use of cryptocurrencies. China and South Korea have temporarily stopped ICOs until they found a set of appropriate rules to impose on them.
When Bitcoin was launched…
…it began to work incrementally slow. Ethereum was not prepared for a massive change that had not been tested. Ethereum programmers have found problems in the DAO (data access object) code. And despite the risks, DAO was released. Investors have bought DAO cryptocurrencies of millions of dollars. Then the code was broken (hacked) and lost Ether cryptocurrencies worth over $60 million. Any cryptocurrency built over the Ethereum platform needs Ether to function. The community faced a dilemma. Developers could restore the blockchain in the state before hack, but this action violates the basic principles of cryptocurrency (without blockchain interventions). Any decision they would have taken would have been a certain some kind of a lost. Let the hackers escape with stolen money to preserve integrity, or restore the funds?
Many said that Ethereum should not fix this theft for moral and philosophical reasons. That people would lose their trust in it. If they intervened now, who says a government or someone else could not do that in the future? That was their dilemma.
They made the decision to restore the funds.
When you contradict yourself with someone, no matter how many arguments you have, it’s impossible to convince him that it’s like you said and he was wrong. People attach their identity to their own opinions. So, those who have fought nonsense about ideology have left their own version of Ethereum, now called Ethereum Classic, and those who supported the cancellation of theft continued with Ethereum. The two share a common history until the time before theft happened, after which it forks (splits in two, maybe you’ve heard of forks). We will discuss future forks in the future.
Discussing the security of the Ethereum fork.
All this has attracted the attention of the SEC that has investigated the DAO hack. Following the analysis, they issued some warnings to investors and imposed some special rules a certain type of cryptocurrency should have, cataloged as “securities”. All companies that develop such coins and exchanges where they can sell the transaction must comply with certain rules. Then the SEC started to look at the dubious companies. And they will continue to do so.
Investing in companies with legitimate cryptomonas will be increasingly important in the future. In autumn of 2017 China completely banned ICOs and asked platforms to return the funds to investors. With so many existing frauds, regularizations can be a good thing. It could lead to the elimination of many bad ICOs. For now they still exist and it is important to know the ICO space well. Many frauds have the same features as other Ponzi frauds and schemes in history (see all sorts of MLM’s). That’s why it’s extremely important to inform and understand some basic stuff about cryptocurrencies and ICOs before investing a fraction of bitcoin into an ICO. Bitcoin is worth over $ 140 billions (at the time of writing). Dozens of new ICOs appear daily. Following a good system to select cryptocurrencies, it will help us cross this mined field and to choose only the winners, for enviable winnings.
How do you choose a good ICO as investing opportunity?
Here are all my criterias:
- What is cryptocurrency doing? It has utility – a good and solid purpose – or its value is given by speculation?
- Is the back team credible? They’ve built any good business, application, cryptocurrency in the past?
- Do cryptocurrencies solve a problem whose solution is suitable for the blockchain, or someone packs a conventional deal in this way to get easy money?
- What will they do with the money they get from the ICO? If the money will be used to build a solid infrastructure then this could be a good ICO. If it will pay some salaries and nothing else, says pass.
- Is the ICO based on some functionality, or is it a kind of platform? Know that if you invest in platforms, because those based on functionalities have short lives. Soon there will be a new platform that will incorporate those features and will do that that cryptocurrency to become obsolete.
- Is there a network effect, or is it just the initial speculation? Search in communities and see what people are talking. They want to use the coin, or talk more than to do some quick money?
- What is the presence in the media and the level of marketing? It’s about exaggeration (hype) or is there a solution to a real problem?
- How easy is the price to be manipulated by the press or other fraudulent means?
- Do you know that specific domain? There are coins for all sorts of stuff. Consider that this would not be an investment in a cryptocurrency but one in a startup. Would you be attracted of that business?
- Did the news come from anywhere? Is the code very fresh on Github (code platform), do they suddenly have intense activity on social media and community has magically appeared and grew suddenly? All these are classic signs of pumping and launching.
- Are reputable investors involved in the project? Search for information on reddit, Facebook, the official ICO website and coincheckup.com..
- Read the code (or ask someone to read it for you). Test it. If you find some hacks projected in the code architecture, say stop. It’s probably a team of bastards who want to enrich themselves.