Lately, there has been a massive hullabaloo due to the “concept of tokens” hitting the cryptocurrency market. The concept is very similar to that of stock exchanges which issue tokens to the investors against any assets. But wait, that’s how a standard IPO takes place, i.e., Initial Public Offerings.
When did crypto-companies hit the IPO? To the best of my knowledge, they haven’t till now. So, how are they issuing these tokens? There’s got to be some offering getting conducted. Right? These offerings are ICOs. The tokens are predominantly linked to the ICOs- initial coin offering.
Now, What Exactly Are ICOs?
ICO lengthened as Initial Coin Offering is a period for early investors in a cryptocurrency venture, to buy coins or tokens at a fixed price. Prices are usually fixed to the bitcoins but in recent times, ICOs have accepted alternative methods of payments like ethereum and other prominent coins. This is a kind of crowdfunding.
The funds invested by the investors are collected by the developer to launch the project. The project is supported by white paper and important people of the cryptocurrency community. It is mostly an unregulated way to bypass the capital-raising ability in comparison to the banks or venture capitalists.
Careful With ICOs
In order to invest in ICO, you have to follow certain rules. If you don’t follow it, it is probably a poor investment. Since it is in unregulated form, the funds are raised without any operational codes. The very reason has invited many fraudulent schemes chiefly in the form of Ponzi Schemes.
There has been a greater risk of losses due to ICOs. The other reason for draining out all the money of the investors is because the concept of cryptocurrency is not equivalent to the success of the project. A fantastic concept sometimes fails to be deployed successfully. So, there is a notion and the execution of that notion. If a developer fails in any of the two, he fails, and more importantly, you fail as an investor.
Example Of ICO And Its Sudden Downfall
Initially, the new issuance of the tokens took the digital market by storm and things were running smoothly. Exchanges like Bittrex and Poloniex listed many tokens mindlessly during the initial weeks of ICOs. There’s nothing special about these exchanges because these operate in the similar form as stock markets, that is the centralized form. Instead of commodity or asset trading, crypto assets like Token A for Token B or Token B for Token C can be traded.
But with the regulation of SEC in the picture (US Securities and Exchange Commission) and unclear guidelines on what constitutes the security in exchange of the cryptocurrency, these exchanges are frightened and are not issuing these tokens as fast as they did. All the investors have been a little bit spooked about the backing of tokens issued by Bittrex.
Bittrex is issuing tokens but not at the same rate as it did before August ‘17. People have started to get panic and they fear that they won’t be able to sell these tokens. What does that mean? The tokens have become non-liquid. And a non-liquid token means a great loss to the economy.
You Want To Buy An ICO?
- Surety: It will be too harsh if I ask you to be certain about the success of the project because even IPO projects crash despite showing the promising launch. But just to state safety, you should buy ICO tokens only if you believe it will not trade lower in the open market after the project is launched. If you can wait and buy an ICO at a cheaper rate, DON’T BUY IT.
- Attention: Again, there is no guarantee of the success of any idea but the intention and the execution of the idea can be analyzed. Buy the ICOs only when you believe that some attention will be given to them after the trade goes live and higher prices seem are foreseen.
- Small Portfolio: Go for the ICO if you are not risking a huge amount. If you want to spend a small portfolio of your entire resources, go for it.
- Don’t Go After Reputation: If you are not going for the idea of the project but for the internet reputation of a person, even a small portion of your portfolio is not worth a spend. Unless you are highly certain, don’t go for it.
- Loss Absorbing Skills: I shouldn’t be in such negative connotation of ICOs but there are a lot of things which could go wrong with ICOs. Be prepared for absorbing the loss, if you have invested big.
- Tokens/Coins: It is a big no if the ICO doesn’t allow you to receive the token/coin. In many ICOs, tokens are launched and are not converted into the liquid.
- The Final Assessment: In order for a project chart to spike in the market, something’s got to be done by the project handler. Now, if you feel that project is doing good as the chart is surging, everything comes down to your conviction. Why? Because generally, the project developers do nothing at the initial stages and one day chart rises all of a sudden. It is this time when you have to assess whether the project is worth an investment because a rise is followed by a downfall. In the case of sudden rise at the initial phase of ICO, it is advisable to sell the tokens because you are already sitting at a fair height without any operation code written or implemented.
Types Of ICO Tokens
There are three types of ICO tokens. Let us go through the list:
Equity Tokens: The best part about the ethereum-based smart contracts is that you can generate your own tokens and it allows initial coin offerings. EOS and OmiseGo are some of the tokens generated in ethereum network. These tokens are equity-tokens. How does it help the startup? The greatest barrier to the entry is capital itself. The tokens will crowdfund the money for the project. Since ethereum operates on the blockchain network, it will make stock trading more accessible and conduct the voting in a transparent manner.
However, lack of regulatory guidelines has led to the malpractices in orchestrating the complete ICO procedure. Any guideline or provision to issue these tokens mean it would again take a central role, annulling the purpose of blockchain i.e., decentralized system.
Securities Tokens: Any tradable asset comes under the term securities. These tokens can be any form ranging from loyalty points to some precious metal. The SEC of United States has certain regulations to these tokens.
Utility Tokens: It is believed that a large number of tokens are securities token in the market but if it doesn’t meet certain requirements, then it is called as “utility token”. I won’t go into much detail about the requirements. Another name coined to describe utility token is app coins or app tokens. They are as good a token as securities as they avail the benefits of products and services to the users.
The most notable characteristic of utility token is that it is not designed for investment. A startup can create utility tokens and can easily sell them in the form of “digital coupons” which exact the promises to implement an idea of new cryptocurrency project.
Companies like Filecoin have raised close to 250$ million funds for its project of decentralized cloud storage service. The company has promised the investors to use the storage space once the project is launched. It is again not regulated by the government hence, a little diligence is required to invest in the company.
Large investors need a proper method of buying, the well coded-business model, and other factors which decide the upliftment of the project. If you want to invest in the ICOs, you can but only after you think like them.