The sudden explosion of Initial Coin Offerings (ICOs) has taken the world by storm. In 2017, ICO fundraising totalled an astonishing $6.8 billion. In the process, fortunes have been made. And, as is the nature of the world of crypto, fortunes have been lost.
If you are looking towards making your own ICO investment, it is important to make the transaction as much investment, and as little gamble, as possible. Given the relatively nascent stage of cryptocurrency regulation, that is very much up to your own market and product research. In this article, we provide a short overview of the ICO investment process, highlighting what you can do to avoid unnecessary financial risk.
An ICO Investment at a Glance
ICOs are, essentially, an offer to the public to buy a new crypto coin. This might seem obvious, but many investors don’t stop long enough to carefully consider this basic question: what are you buying?
Unlike stocks, which reflect ownership rights to the company in question, crypto coins represent some utility or asset. As utility, the coin is valuable within the particular network created by the company that issues it. As an asset, the coin valuable only insofar as the market values it. And eventually, that long term value depends upon utility as well.
Long story short: investing in crypto is necessarily an investment in the underlying value, and the underlying economic rationale, of the coin in question. Many investors buy coins with the purpose of reselling them in the short term for profit. This is a more unpredictable and inherently dangerous game, but one that might be worth your while. However, the best way to play that game will also be to understand the underlying value of coins – that is the most reliable to way to know if a particular coin will appreciate in value over time. In other words: do your own market and product research.
Step 1: Stay on Top of New and Upcoming ICOs
There are several prominent online resources to help you stay informed about upcoming ICOs. Some of these are ICO watchlist, top ICO list, and ICO Alert. Another great option to stay on top of ICO news is to set Google alerts for yourself, and to get involved in online communities where members discuss upcoming and past ICOs.
Step 2: Do Your Due Diligence
As the first section of this article emphasized, this is the most important part of the ICO investment process. Here are a few important steps to take to ensure that the new crypto coin to be issued will be worth your investment.
First, scrutinize the white paper and evaluate use cases. If there are no use cases, be very skeptical. Based on what you read and learn, ask yourself whether you understand the underlying value of the coin in question. Does it have potential real world value in the future? Do you understand the underlying economics? Remember, you are essentially investing in that value, not in a number of coins.
Check the project’s minimum viable product (MVP) and determine whether the MVP demonstrates the team’s ability to execute. Even the most brilliant idea is worth nothing if the team has not been able to translate that idea into a workable product.
Find out of there are competitors for the product, and if so – investigate to see whether the coin you want to invest in, has a competitive advantage. That advantage may simply be a first mover advantage, which can be significant. It is not necessarily enough to ensure the value of the coin you are looking to purchase, however. Be critical.
Finally, investigate the team behind the ICO. What is their background and experience? How much information is available on them? Do you trust them to create the value they are promising?
If you have completed your own due diligence process and you feel confident in the ICO investment, the rest of the process is fairly easy.
Step 3: Buy Ethereum or Bitcoin
Most ICOs do not accept fiat in exchange for new coins. In most cases, you are required to invest in the ICO with Ethereum. There are cases where Bitcoin is also accepted. If you do not own either of these coins, you should use an exchange that allows you to purchase Ethereum or Bitcoin for fiat – Coinbase is the largest of these.
Step 4: Get a safe, offline wallet for your coins
To invest in an ICO, you will have to send your Ethereum to the company in question, and they will send the coin you are buying back to your wallet. This transaction is fairly simple and intuitive: you will only need your own wallet address as well as theirs. The first step, however, is to get a wallet that is safe. Coinbase keeps your private keys online, and is therefore fairly vulnerable from a security standpoint. Getting an offline wallet should be your first step. There are many options out there, for example Exodus.
Step 5: Follow the ICO Instructions
The company should provide fairly detailed and (hopefully) easy-to-follow instructions for their ICO. Usually, the process involves a simple transaction between digital wallets as described above. Depending on the circumstances surrounding the ICO, the company might have to ask more information about you (so-called Know Your Customer or “KYC” processes). This is done if required by securities law, and generally means that the company has registered the ICO with the Securities and Exchange Commission – a good sign.
Hire a Cryptocurrency Lawyer Today
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