The Factors You Should Consider Before Investing in an ICO

14. November 2017.

Initial coin offerings, or ICOs, are have been occurring at a rapid rate as cryptocurrencies continue to gain mainstream traction. Despite how significant the growth of cryptocurrencies has been and how substantial its market cap has become, many investors are nonetheless unfamiliar with certain aspects of cryptocurrency investing, including the manner in which these digital currencies are brought to the public market.

An ICO is the ground floor-level offering of a completely new cryptocurrency to the public. Similar to an IPO, this is an investor’s chance 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 other than its initial price. In kind, the same positive and negative variables apply to investment in ICOs, requiring investors to do their diligence and mitigate the risk of loss as appropriate. However, today’s ICOs have a unique property: As a result of strong attention to cryptocurrencies from the viewpoints 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 large-scale ICOs, since there are many eyes on each coin offering, which can identify and call out any problems or shortcomings.

The ICO is a unique investment vehicle because it uses the “network effect” to build up a strong base of users. For existing major networks, whether they are social media-based, cause-based, profession-based, or based on other factors, there exists a previously built-in group of like-minded participants, which is the primary necessary ingredient for a successful cryptocurrency. ICOs are already being created 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 explore new avenues using a cryptocurrency that is specific to something they already do or enjoy.

As it’s a relatively new type of asset, investors must still exercise caution when investing in cryptocurrencies, a warning that also applies to ICOs. They should apply critical thought to 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 overall progress. 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 investing in an ICO.

There are many untapped corners of several markets, of which new cryptocurrencies and ICOs stand to leverage. 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 personal ability to tolerate risk. Cryptocurrency investing has been an incredibly exciting arena over the past few years. With several new and innovative tokens coming to the market, ICOs are a great way to tap into potential before it materializes.

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