ICOs, sometimes equated to the more conventional Initial Public Offering, democratize the fundraising process by acting as a large-scale crowdsourcing tool. While token sales are still a relatively new phenomenon, they quickly gain traction, allowing a global pool of investors to fund the next generation of businesses.
The major issue with initial coin offerings as they gain popularity is that they are uncontrolled. Anyone who wants to write a white paper, develop a simple landing page, and start collecting payments via a digital wallet has few obstacles. Several dishonest entrepreneurs are taking advantage of the system. As a result, picking the needles out of the approaching haystack might be quite difficult for an investor.
What's the Difference between Initial Coin Offering and Initial Public Offering?
While IPOs only deal with investors, ICOs, like crowdfunding events, may deal with supporters who want to invest in a new project. However, ICOs differ from crowdfunding in that ICO backers are motivated by the potential for a return on their investment, whereas crowdfunding campaigns are essential contributions. Because of this, ICOs are also known as crowdsales.
At least two structural differences exist between ICOs and IPOs. To begin with, ICOs are mostly unregulated, which means they are not supervised by government agencies like the Securities and Exchange Commission (SEC). Second, ICOs are considerably more structure-free than IPOs due to their decentralization and absence of regulation.
ICOs can be organized in several different ways. A company will set a specified financial target or limit in other situations, which implies that each token sold in the ICO will have a predetermined price, and the overall token supply will remain constant. There is a fixed supply of ICO tokens but a dynamic fundraising goal in other cases, meaning that the distribution of tokens to investors is decided by the amount of money raised in the ICO. In other words, the higher the overall token price, the total cash raised in the ICO.
Others still have a dynamic token supply that is determined by the amount of money received. The price of a token remains constant in these situations, but there is no limit on the total quantity of tokens, except the ICO length.
Example of an Initial Coin Offering (ICO)
The sums raised by the greatest projects grew in tandem with the growth of the ICO industry. When evaluating ICOs, one can consider both the amount of money raised and the return on investment.
ICOs with a high rate of return on investment don't always raise the most money, and vice versa. Ethereum's initial coin offering in 2014 was a forerunner, raising $18 million in 42 days. Due to its advancements in decentralized apps (dApps), Ethereum has proven to be significant for the ICO market in general. Ether was first priced at roughly $0.67, and as of September 24, 2020, it is trading at $348.99.
A two-phase ICO for a firm called Antshares, which eventually rebranded as NEO, launched in 2015. The ICO's first phase ended in October 2015, while the second phase ran until September 2016. NEO made around $4.5 million at this time. While it is not one of the most successful ICOs regarding raised funds, it has offered excellent returns to many early investors. At the time of the ICO, the price of NEO was less than $0.03, and it peaked at roughly $187.40.
In terms of overall funds raised, ICOs have recently raised much more money. Dragon Coin raised $320 million during a one-month ICO that ended in March 2018. More recently, the firm behind the EOS platform broke Dragon Coin's record by raising $4 billion in an ICO that lasted a year.
However, ICOs have a lot of potentials to fund large-scale initiatives that will fundamentally alter our economy. Before you invest in any ICO, watch for these five signs.
Number 5. Examine the team and their backgrounds.
Companies that are serious about making a token offering will not be concerned about their genuine identities being made public. It is usually a red flag if a project does not provide thorough information on its founding team, investors, or advisors. If a firm is concealing something from you, it is almost certainly concealing something terrible.
Projects such as UbiquiCoin, a "two-coin" price-stable blockchain ecosystem, on the other hand, are open about their creation narrative and team. They can show that they have years of experience in and around their field. This experience equates to almost 100 years of cumulative experience in the case of UbiquiCoin. This not only establishes credibility but also functions as a long-term differentiator and competitive advantage.
Number 4. Look for a vibrant and engaged community.
The quality of the community is also an important component of any real blockchain initiative. Companies must understand their clients in a competitive crowdfunding market and establish a strong and active presence among them.
The most popular coin offerings feature extremely active forums, events, and blogs, which allow the community to participate in the company's decision-making process. You can also use these channels to ask questions, interact with other potential investors, and learn more about the project's technical aspects. When a blockchain project's community is silent and empty, it's usually a terrible indicator.
Number 3. Look for confirmation and social proof.
It is generally beneficial to observe when companies have social proof of user validation, albeit this is not always the case. Companies with thousands of active users, such as Cointal, a large peer-to-peer cryptocurrency marketplace, will issue evaluations and press releases to demonstrate the quality of their products. Their unification service, which allows customers to instantly switch currencies using everything from credit cards to ACH payments, has already gotten a lot of press.
Council has processed over $15 million in trading activity in the last two months, adding to its social proof. This is a good sign that the team has been able to establish traction in the blockchain community.
Number 2. A product roadmap and technical details should be found.
While any creative designer may develop some concepts and create a nice landing page, it takes a genuine engineer to map out a product's technological roadmap. Most, if not all, projects will have a publicly accessible whitepaper outlining how and when they plan to construct the product.
You should spot when projects make unrealistic claims regarding the viability of their roadmap by reviewing this implementation plan. Furthermore, if the proposal lacks any technical foundation or specified feature sets, likely, the team is far too early in the process to be seeking major finance. The blockchain project's codebase is another place to measure against and track progress. At the very least, you'll want to observe that the team has started setting up code repositories. And if it's empty, it may be a very concerning indicator.
Number 1. Your own independent research should be done.
As an informed investor, it is your job to undertake complete, independent research before making any monetary commitment. It might not be easy to know who to trust in today's culture, where everyone and their family members claim to be recognized experts.
The short answer is that you should always make your own decisions, ignoring the noise from marketers and salespeople who want you to support their own personal interests. Pay attention to writers' and creators' implicit prejudices, as they may have their own hidden goals. When you don't know what you're looking for, it's quite simple to fall for a con, therefore, scrutinize every offer.
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