With the blockchain buzz reaching a frenzied pitch, investors are scrambling their chips around various options to invest in cryptocurrency. With all this initial craziness, it’s hard to focus on what’s real enough to warrant an investment.
As far as start-ups are concerned, they have a whole new avenue to garner that highly elusive initial capital. The recent trend of startups launching ICOs has caught up fast investors flocking to these events in droves.
Understanding the ICO Concept
To clear away the obvious, what is an ICO? An ICO or Initial Coin Offering is basically the blockchain-version of an IPO or initial public offering where a company seeks capital from investors.
In this scenario, the investments are made through shares, whereas in the case of an ICO, investors buy “tokens” of a cryptocurrency launched by the start-up. The sales from these tokens are what provide the financial push for the company’s startup operations.
Unlike an IPO, ICOs do not have a universal table of rules. Each ICO has a unique set of rules that are published in the project’s whitepaper. The cryptocurrency landscape certainly looks exciting at this point promising high returns as a long term investment. That being said, there are quite a lot of fraudulent claims being made by several startups about their ICOs. It’s important to have a decent understanding of what qualifies an ICO as worthy of your investment.
The Relevance of the Token
Stripped down to the bare minimum, an ICO is basically an event that launches a new cryptocurrency token. Now, the question that any company launching an IPO should clearly be answering is the reason behind creating a new token.
A relatively established cryptocurrency such as Ethereum or Bitcoin could easily serve most purposes. A lot of projects are just scams that spin a story around some new unheard-of concept as an excuse to sell a practically invalid token.
Apart from that, you need to verify the actual application of blockchain that contributes to operations of the project and why it justifies not using any of the existing blockchain technologies with high functionality like Ethereum’s smart contract.
Above all, be wary of tall claims made by the company. If they constantly use words or phrases like “Guaranteed high returns”, “Get Early Access And Become Rich,” etc., then they are most likely shady businesses looking to scam you off your money. Similarly, if the marketing of the company looks like it is trying to pressure you into “investing as soon as you can,” then that too is a red flag. Real, genuine companies rarely use such statements.
All said and done, regardless of the current volatility in cryptocurrency markets, ICOs are going to become a much more common approach to raise funds. The number of projects is going to be high, that choosing from the lot will be even more difficult for new investors.
By that point in time, if you have invested enough time to understand how an ICO works, observe the trends of a successful project, and read enough to make an assessment, your prospects of getting a high return on your investments would be substantially better.
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