As the cryptocurrency market continues to expand and develop, 2017 saw the emergence of a new phenomenon: the ICO (Initial Coin Offering). During that year, billions of dollars were raised through ICOs and the trend continues in 2018.
ICOs are a controversial crowdfunding tactic whereby blockchain tech creators sell tokens in exchange for fiat currency. These tokens can then be traded on exchanges and, in some cases, will be replaced by altcoins once the new blockchain tech is up and running. ICOs are attractive to startups who don’t need to go through the expensive and time-consuming process of attracting venture capitalists, hosting IPOs (Initial Public Offerings) and getting listed on stock exchanges.
ICOs also increase a technology’s user base, helping with its performance and development.
Those are the benefits for the token issuer but should ICOs be part of your investing strategy? As with all investments, it is up to you to make a decision based on solid research. This article is designed to help by laying out the main pros and cons of ICO investing.
4 Pros of ICO Investing
Profit Potential
Where better to start than with the potential returns available from ICO investing. Everybody is looking for the next ‘Bitcoin’ and with good reason. When you look at some of the ROI figures enjoyed by early investors in the most successful cryptos (e.g. Stratis, NEO, Ethereum, IOTA and NXT), they lie in the range 50,000 to over 1 million per cent!
Of course, these are the tip of a very big iceberg and most investors will not come anywhere near achieving those kind of figures. However, when VC firm Mangrove Capital Partners crunched the numbers in October 2017 they worked out that ICOs had generated over 1,300 per cent returns on average!
Democracy
Unlike with traditional IPOs, practically anyone can invest in an ICO. You don’t have to have a bank account or to somehow qualify or be accredited to trade. You don’t even have to prove you are a sophisticated investor. With traditional IPOs, retail buyers pay an additional premium and so miss out on the biggest profits which tend to be reserved for a select few venture capitalists. With ICOs, anyone can be part of a pre-sale to maximize their potential ROI.
Liquidity
Liquidity is about how free you are to move funds into and out of your investments. At the low end of the liquidity range are investments where your money is tied up for the long haul. A good example is investing in future structured settlement cash. This is where you pay structured settlement purchasers a lump sum in exchange for guaranteed future payments. This is very secure but you are unable to access the payments early.
ICO investing is at the high end of the liquidity range. In most cases, tokens can be immediately traded on crypto exchanges and converted to other currencies – crypto or fiat – whenever desired.
Part of a Movement
Investing in ICOs is one way to embrace the concept of decentralized currency and – ultimately – power itself. We have already seen how ICOs open up investment opportunities to the wider public. By supporting the industry itself, some of the more revolutionary visions of blockchain pioneers will become realized. ICO investors often form communities of like-minded people who believe in decentralization and cryptographic technology.
4 Cons of ICO Investing
Risk
ICOs are regarded as an extremely high risk form of speculation. The cryptocurrency and blockchain sectors are very young and subject to extreme fluctuations as market sentiment waxes and wanes. Many (if not most) ICOs fail to meet their funding objective and unless refunds are part of the Ts and Cs, their backers’ investments will be wiped out.
No proof of concept
Creating an ICO is very easy with little more than a white paper required to kick off the process. This is why research and due diligence are so important before engaging in this type of investment. The best companies will have experienced teams and may have existing blockchain products out there. Or they may have a very strong concept linked to one of the established blockchains. For example, many tokens use the Ethereum network and follow the ERC-20 standard.
On the other hand there are poorly thought out schemes dreamed up by novices and based on little but hope. Add to that the various Ponzi schemes and downright scams and there are a lot of ways to get your fingers burned.
No protection
You can’t have your cake and eat it! While the lack of red tape has opened up the potential for high risk speculation to a wider pool of investors, this also means that there is no one there to clean up the mess if you make a bad investment. To reiterate, ICO investment is considered an extremely risky speculative activity.
This lack of regulation is unlikely to last indefinitely. While some countries are banning ICOs (e.g. China and South Korea), others are poring through the rulebooks to see just how far ICOs can be brought into line with existing regulations and what new regulations are needed. Some ICOs may have already been in breach of the law and could be penalized further down the line.
No ownership
When you buy a share in a company, you literally own a little piece of that company. Together with other shareholders, you have the right to help determine the company’s direction and other aspects of its operation.
With ICOs, no ownership is transferred. While the company will obviously have a vested interest in success it will be free to make its own decisions about how that success will happen.
The Verdict
As far as investments go, crypto currencies are high risk and many will fail, losing their backers money. On the other hand, there are limited but very real opportunities for ‘off the scale’ returns. Therefore, this type of investment is most suitable for people with a strong appetite for risk or as a very small part of the portfolio where it can be balanced by more secure holdings.
About Kathy:
Kathy is a financial adviser and blogger. In her blog, she addresses various structured settlement issues including how buying and selling structured settlement payments work, as well as how people should deal with it based on their financial situation. She is associated with Catalina Structured Funding, Inc., a company that provides customers with most cash for their structured settlement or annuity. Send her an email or buzz her on twitter to discuss your situation.
