Recently, the world has been swept by a wave of ICOs. Startups are releasing their tokens one by one, attracting tens of millions of dollars. People buy tokens to make a profit, thereby providing startups with investments for development. However, no one is safe from the fact that the startup may fail so that all the tokens will lose their value.
The traditional way to attract large capital is the so-called IPO (Initial Public Offering). The company sells its securities through the stock exchange, thereby making a profit much higher than its annual income. IPO is a special form of raising funds. The procedure for preparing shares costs the company a lot of time and money (up to one year). There is a high entry threshold for investors as well. Thus, only large companies can go public, and only large sponsors are able to purchase their shares.
In the cryptocurrency market, the concept of ICO (Initial Coin Offering) arose. Companies that decide to raise capital in this way issue digital tokens instead of shares. In the future, investors can use the purchased tokens in the following way:
Since the ICO deals with the release of tokens, the project conducting such a campaign must work on blockchain technology. Basically, ICOs are launched by fintech startups, whose product exists only on paper. Even if, at first glance, some business has nothing to do with information technology (IT), this does not mean that it cannot hold an ICO. You just need to think how you can implement blockchain technology in this particular project. After all, the blockchain was created to make life easier. A simple example: a farm can create an Internet platform through which it will be possible to purchase products with company tokens on special terms.
In an IPO, investors acquire a stake in a company, become its co-owners, while ICO sponsors receive only an internal coin. The legal status of the ICO has not been determined either - investors are not legally protected in any way in the event of a failure of their financing project. Sometimes, the companies raise funds, but the product is never released. Now the crypto industry is a kind of "Wild West," as everyone can set their own rules.
Therefore, when investing large amounts, you should carefully study the project and pay special attention to the development team.
You can also invest tiny amounts in ICO; the prices per token start from a few cents. This is another important distinguishing feature of an ICO. Anyone can become an investor. To do so, you just need to create a cryptocurrency wallet on any convenient platform, replenish it with any amount, and wait for the start of sales.
There is also the practice known as Pre-ICO. This procedure is optional, but more and more companies are choosing to conduct a private presale. At the Pre-ICO stage, tokens are even cheaper, but their acquisition is also associated with great risks for investors. The revenues from the pre-sale of tokens are often invested in the beta version of the product.
Thus, blockchain offers companies to attract investments to implement their ideas in a simple way, without selling the company's shares.
The ICO market is very young. However, it is experiencing some growth problems associated primarily with an uncertain legal environment and an increasing number of unscrupulous and even fraudulent startups.
Most of the major ICOs at the moment are held on the Ethereum platform and, accordingly, collect funds in ETH, so, first of all, you must purchase Ether. This can be done by converting other cryptocurrencies to ETH through the exchange and sending your cryptocurrencies to any Ether wallet that supports ERC20 tokens.
Immediately after the launch of the ICO on the website of the project you choose, the ETH address will be published. All you need to do is transfer the desired amount to it. After that, according to the terms of the smart contract, you will receive your tokens to your ERC20-enabled wallet.
A smart contract is a computer protocol that, based on mathematical algorithms, independently conducts transactions, fully controlling their execution. The main advantages of a smart contract are:
You can store the received tokens or transfer them to other users. In the latter case, it is important to determine in advance which exchange you plan to use. Some tokens are presented only on certain exchanges, and some tokens can be used only within their native projects. Therefore, it is important to familiarize yourself in advance with the terms of the ICO and the goals of its creators.
Every investor should remember that participation in an ICO is not only about high profitability, but high risks. The sale of tokens is in many ways similar to the traditional venture capital market, where players expect startups to grow 30-40 times, but their investments on a regular basis do not meet expectations.
At the ICO stage, companies rarely have a finished product. Often there is a bare idea and a visual prototype.
They still have to find clients and the right people for the team. At this stage of development, companies can count on the very first round of venture capital investments. In the venture capital market, this is the most risky stage of investment. On average, out of 10 such rounds, half of startups bring nothing to the investor, 3-4 have low profitability, and only 1-2 show rapid growth.
Factors to consider when analyzing a project:
Ideal product features include:
It is difficult to identify the best token model, but most features involve:
Significant advancements prior to ICO reduce investor risk. Examples of such achievements include:
6. Team. For many investors, this factor is the main indicator of the further project’s success. A good team can at least change a product or come up with a new one, and a bad team can fail even with the best idea.
7. ICO conditions. Here you need to pay attention to 3 components: ICO boundaries, conditions for holding, and distribution of tokens. There is no universal format, and conditions may vary significantly depending on the specific crowdsale.
Please note: purchasing or selling Cryptocurrency carry significant risk. Prices can fluctuate at any time.
Because of such fluctuations, Cryptocurrency may gain or lose value. This is your responsibility on how to handle your own assets.