ICOs are crowdfunding events where a startup raises funds by emitting cryptocurrency coins or tokens. Investors become anonymous partners in the startup by buying tokens while betting that these tokens will soar in value once the project is complete. That’s pretty much what an ICO is, apart from the compliance regulations which are appearing in some countries, complete bans in others, and other legal and business complexities.
Should you participate in an ICO? It depends. What are your goals? For how long can you afford to allocate the investment money? Will you need the financial resources in the near future? Is this savings money from something critical, such as college savings for your kids? These are some of the important questions you need to ask before investing in a ICO.
An ICO is a high risk investment. If you access an ICO statistics website you’ll find that most ICOs are not profitable upon launch. The times when you’d join an ICO at the pre-sale and make a quick buck when the tokens reached the exchanges are long gone. Remember the famous quote by the “Oracle of Omaha” Warren Buffett : “You pay a high price for a cheery consensus.”. Once everyone agrees that an ICO pre-sale will be profitable, everyone pays more for the tokens at the pre-sale and everyone tries to sell at once when the token finally goes on the exchanges. This happened to tens of ICO’s during 2017 when investors tried to replicate the successes of 2016.
But after the tokens go live, many of them do become very profitable. Excellent examples from 2017 include Cardano ADA and Power Ledger, bot of which are still trading at multiples of their pre-sale prices, even after the recent bear market (first half of 2018). Therefore, deciding whether to invest in an ICO is also a matter of timing. A startup project may have an amazing product but the timing must also be right. A lot of great projects are currently stuck in the chasm due to the recent down market.
If you can spare the money, won’t need it for 2 to 4 years and you can honor at least 12 months of your personal finances without cashing out on the ICO investment, then an ICO is likely for you. You may be asking yourself whether so many college students, dads, moms and others who invested in ICOs in 2017 fit this profile. The answer is that they likely don’t. And many of them lost a lot of money, which caused authorities to step in.
Which brings us to another important point when weighing the risks of entering an ICO: regulatory risks. There probably isn’t a more risky investment right now, regulation-wise, than cryptocurrencies. We don’t really know where regulators are going in the main economies involved in cryptocurrencies. China, USA, Europe, South Korea, Russia, Taiwan, Hong Kong, Malaysia and others in Asia are the main players in crypto and they all have been back and forth regulation-wise. Russia has issued some regulatory measures for Bitcoin, giving its central bank full control over it, others are sure to follow suit.
A mere rumor of cryptocurrency ban in China was able to make Bitcoin drop 30% overnight. Clarifications later published, that it wouldn’t be a complete ban but only an investigation into the practices of some Chinese exchanges, brought the value back up 20 to 30% in a matter of hours. Which shows that 30% swings up and down are commonplace in the cryptocurrency markets. All it takes is for one US Senator or Congressman to emit a positive or negative opinion on cryptos and the whole market overreacts in violent movements. Big banks have been joining the cryptocurrency train, CME in New York has begun trading Bitcoin futures a while back and everything points in the direction of Bitcoin and cryptocurrencies becoming fully regulated and legalized in US markets. But will they ever be considered currency? Will they always be traded as securities? We really don’t know. The regulatory risks continue to cast a shadow over cryptos and only time will tell where everything is going.
ICO’s are a decentralized and modern crowdfunding method. It gives investors from anywhere in the world a chance to participate in innovative startups which would be, otherwise, out of reach. The decision on whether to invest in an ICO must be made based on current financial situation, local regulations regarding ICO’s and after carefully weighing the risks. Money invested in ICO’s should be allocated for at least one year and investors shouldn’t expect an immediate return upon the initial coin offering. Many ICO’s do provide significant ROI right from the start, but this is quickly becoming the exception, not the norm.