“Initial coin offerings” are all the rage these days. A project called Bancor raised $153 million in a few hours. This week, another called Status.im raised at least $64 million. Both evoked so much excitement that transactions clogged the underlying network. The startup behind the Kik chat app is planning an ICO sometime this year. according to a CoinDesk recent report“So far in 2017, blockchain entrepreneurs have raised $327 million through ICO offerings, a figure that now exceeds the $295 million raised through venture capital funds.”
As the name implies, ICOs are inspired by standard IPOs, although in practice they are very different. The easiest way to understand an ICO is that it is crowdfunding on a blockchain (the technology behind Bitcoin). Investors buy tokens, units of digital currency, which are usually meant to be an integral part of the app the startup wants to build. The bet is that the application will be popular and therefore generate demand for the tokens, increasing their value. Until now, most ICOs are based on Ethereum, which is like a version of Bitcoin that can also host applications called “smart contracts”.
There is a lot of money here, much of it from China. But many investors around the world want to jump in from scratch, hoping to become shareholders in a startup that could become the next Google or Facebook. Meanwhile, critics say that ICOs are schemes to evade SEC regulation, or that ICOs have potential but the the current fervor is a bubble.
Let’s get to the real question: Should you invest? Is this a good way to get rich quick? In the case of most ICOs, the answer is no, but contrary to Betteridge’s LawThere are times when the answer is yes. As with all high-yield investments, buying cryptocurrencies is risky and ICOs are even riskier. And as with all active investing in general, it’s wise never to commit more money than you can afford to lose.
That said, if 1) a project makes sense as a business and 2) there is a demonstrated demand for it, and 3) the business is something that needs a cryptocurrency token system to function, and 4) you can commit the funds without difficulty, then sure, go ahead. Alternatively, if you know you are a talented speculator regardless of the underlying value of an asset. (However, this is probably not true, even if you think it is. Even most professional stock traders don’t beat the market.)
That said, it is crucial to understand that buying an ICO is not the same as buying stock. When you buy stock, you literally buy a piece of the company. Likewise, actions are regulated and obligations such as fiduciary duty and accreditation are involved. The legal infrastructure may come to cryptocurrencies eventually, but we are not there yet.
Rather, as Investopedia put it clearly: “The early investors in the operation are usually motivated to buy the cryptocurrencies in the hope that the plan will be successful after its launch, which could translate into a higher cryptocurrency value than what they bought before the start of the operation. draft”.
On top of that, a typical ICO company has a website and whitepaper, but no working product. The consensus in the venture capital world is that it’s not a good thing for a startup to make too much money too fast. The founders will feel compelled to spend the funds simply because they are there, and the abundant resources will reduce the need to go to great lengths to make the product fit for market.
An ICO allows you to get out before you start
— Adam Ludwin (@adamludwin) June 21, 2017
If raising a lot of money correlated with building something people wanted, ICOs would be awesome. Unfortunately there is no correlation.
— Adam Ludwin (@adamludwin) June 21, 2017
Nor is Ethereum itself a stable store of value. A flash-crash rocked the market on Wednesday. Prominent Ethereum developer Vlad Zamfir? said in march, “Ethereum is not secure or scalable. It is an immature experimental technology. Do not rely on it for mission critical applications unless absolutely necessary!” It is worth emphasizing that ICOs, which are generally based on Ethereum, are themselves an experimental mechanism.
To finish: you may be able to make money by investing in ICOs. But there are substantial risks involved and you should try to approximate the due diligence that a traditional investor would perform before committing cash to a new project.