ICOs' risky combo: A hot market with a learning curve
Initial coin offerings, also known as ICOs, are constantly occurring as cryptocurrencies are gaining mainstream traction.
Despite how significant the growth has been and how substantial the market cap has become, many are still not familiar with certain aspects of cryptocurrency investing, including how these currencies are brought to the public market.
An ICO is an early-stage offering of a completely new cryptocurrency to the public. Almost identical to an IPO, this is an investor’s opportunity to get in at the earliest possible point, before the market forces of supply and demand can cause the asset to be sold at a price different than its initial price.
In kind, the same positive and negative variables apply to ICO investments, requiring investors to conduct their due diligence and mitigate the risk of loss as appropriate. However, today’s ICOs have an interesting property: As a result of strong attention to cryptocurrencies from the perspectives of both investment management and regulatory compliance, the marketplace is efficient and informed. Accordingly, the risk factors that surround such investments as unproven or untested technologies do not necessarily apply to major ICOs, since there are many eyes on each coin offering, which can identify and call out any problems or shortcomings.
ICOs are unique investment vehicles because they use “network effects” to build a strong base of users. For existing major networks, whether they are based in social media, causes, professions, or other factors, there already exists a built-in group of like-minded participants, which is the primary necessary component for a successful cryptocurrency.
ICOs have already been started for communities of all types, for the simple reason that they are a secure, sustainable mode of facilitating transactions that builds on a community’s existing strength, while adding brand-new bonds within the community to do new things with a cryptocurrency that is specific to something they already do or enjoy.
As it’s a relatively new asset class, investors must exercise caution when investing in cryptocurrencies, which includes ICOs.
They should critically think about questions such as the market necessity of the coin (e.g. “Is this currency doing anything differently than this other currency?”), which economic model underpins it (that is, it may be a good idea in theory, but it might not attract actual demand), and how transparent the company is being about its progress to date.
For example, is the company using independent auditors? Is it clearly communicating its development milestones to the public? These are similar expectations to those investors would have in the case of a stock IPO. It is therefore advisable for investors to hold themselves to the same standards when considering a potential ICO investment.
There are many untapped corners of several markets, of which new cryptocurrencies and ICOs stand to make the most. Significant potential may exist in a given ICO that comes to the market. However, like any other form of investment, people must be willing to do their homework, and they must understand their ability to tolerate risk. Cryptocurrency investing has become an exciting arena over the past few years. With several new and innovative tokens entering the market, ICOs represent a great way to tap into potential before it materializes.