Blog > English

ICO Risks – How to Choose the Right One?

Initial coin offerings (ICOs) have become a popular way for IT startups to raise funding for their projects. Yet, many experts are warning the public about the risks associated with ICOs, reminding investors to be careful as the practice is still unregulated. 

ICOs, also known as token sales, are a good way for startups to raise money from interested parties, similar to crowdfunding, by allowing them to buy a stake. In return, investors receive a token or cryptocurrency. The tokens are not equivalent to shares in the company. This, of course, depends entirely on how the ICO and emission models are set up - if they do not provide dividends, voting rights on company policy or buy back initiatives, then they are not equal to securities or shares. 

ICOs are very popular among cryptocurrency and blockchain startups, and many were launched in the past few months. After the so-called cryptocurrency bubble (when prices of all major coins went up a couple of thousands percent), many investors turned to ICOs in search for the prospective investment opportunities, so that could be the reason for the huge success of ICOs.

In 2017, there have been over 100 ICOs so far, which collectively raised US$1.25 billion. Many startups have raised a large amount of money, for example - Tezos, a company that has created a new blockchain, raised over US$230 million in a few days.

 Below is a list of things to consider when investing in ICOs, which can come handy for all those interested in backing new tech projects.

 

The Novelty Factor

When it comes to investing in an ICO, it is important to identify the key features of a project that make it different from the endless sea of coins with the same or similar properties.

 For example, when the cryptocurrency world was young, there were many forks of the original Bitcoin blockchain with just minor differences, such as an increased supply, or quicker transactions. The majority of these coins have since been abandoned. The only people that made any money were the creators of these fake coins.

A good example of innovative cryptocurrencies are MaidSafe, Storj, and Sia. They are different from Bitcoin as their primary focus is on decentralizing data storage, and not on being a sole cryptocurrency.

Another great project is Ethereum. It made possible to create more interesting applications with the blockchain on top of just transferring funds (like Bitcoin does). It’s no surprise that the project was able to amass one of the largest ICOs to date.

 Investing in an ICO which is too similar to an established project is usually a bad idea, because they often prove unprofitable. These types of ICOs often look to use the hype of other successful projects in order to earn some quick cash. Case in point, after the Ethereum success there were a great many ICOs that promised more of ‘smart contracts.' None delivered.

 

Early Investment Bonuses

Another thing to pay attention to when evaluating an ICO is whether or not the developers are offering a bonus incentive for early investors. The bonus can vary widely from project to project, of course. For example, an ICO could offer a 10 percent bonus distribution for the users who invest before a 100BTC milestone is reached. This means that, if 1 BTC got the investor 1000 coins, with the bonus they would receive 1100 coins instead.

Of course, if one is investing towards the end of an ICO in which a bonus was offered, the investor must be aware that those who invested early will theoretically have more control of the total coin supply.

 

Escrow and Refunds

One of the good ways to learn more about the ICO before the investment is by identifying who is handling escrow services for the crowdfunding.

Reputable development teams will enlist individuals with a strong reputation within the cryptocurrency community to act as trustworthy holders of raised funds. As they put their reputation on the line, these individuals are less likely to scam the investors or try to run with the raised funds.

Additionally, well-organized developers will have set in place a condition where, if a certain amount of funds is not gathered, the individuals who contributed BTC will be refunded. This acts as a fail safe protection in the event that a project ends up under-funded.

 

Developer Credibility – Public vs. Anonymous

 Regarding the credibility of developers, there is a lot to be said about public team vs. anonymous. When the development team is public, they are faces o the company and individuals that could theoretically be held accountable if they squander raised funds, or run off with the money.

Of course, there are also ICOs that are held by anonymous developers, some of which have a credible background, and some of which are new to the cryptocurrency world. ICOs held by the anonymous developers who do not have a long-standing presence in the community could be somewhat risky. The problem with this situation is that there is no accountability if the developer cuts and runs, and, with no former projects to look upon, it's hard to tell if they’re capable of finishing the product.

 

Three Types of ICOs

The amount of money raised by an ICO doesn't guarantee the corresponding quality of the product. Good marketing, clever branding, SEO wizards - all of these things attract attention, and the more people talk about the product - the more investment it gets.

Keeping this in mind, we've sorted three types of ICOs:

 

High risk

No product. These projects lack anything that can be touched or tested by investors. The team presents only the project pitch and a promise. The majority of these projects have GitHub accounts with some code, but it would take a few full-time analysts to examine it just on surface-level.

 

Medium risk

This is company's second/third product. If the company has great and well-accepted products that have been around for some time, that gives them some sort of credibility. The existence and usefulness of the previously created product is certainly a good starting point for investors to consider putting their money into the ICO.

 

Low risk

The company offers the functioning product. Projects rarely fall into this category by offering a usable version of their product during the ICO. Ethereum was one of the rare projects that fit into this category.

 

Conclusion 

ICOs will become more and more popular as a method for raising funds. There will be plenty of projects to choose from, hence it will become even harder to assess these projects.

It is vital to investigate and read as much information as possible and write down all the important aspects, positive and negative, before making an investment decision. Investing into innovative, credible, public ICOs can bring great returns, but when investing make sure you've done your homework in order to avoid losing your investment.

 

Having questions about ICOs? Feel free to post them in the comments, we're here for you.