Hey Steemians! Today I am going to talk about ICOs. Are they good investments? And what are the risks involved in investing in ICOs?
What are ICOs?
ICO stands for initial coin offering. It should not be confused with IPOs (Initial public offering) of companies. I think there are many who like to compare ICOs with IPOs. But they are fundamentally different and all ICOs will seemingly be scams if you draw such comparisons.
Investing in IPOs generally allow you to gain shares of a company. With shares, you gain voting rights. On top of that, you get a share of dividend whenever the company issues one. In addition, after an IPO, the company's shares will certainly be listed in one of the stock exchanges. After which, you can freely trade the shares you have acquired through the IPO.
On the other hand, in an ICO, you get tokens from the sale. Tokens do not always give you voting rights. But you do gain some other rights depending on the nature and use of the tokens. This article gives a very good summary. Also, after the token sale, the coin may not be listed on exchanges.
Isn't ICOs highly risky then?
Yes and no. I will like to compare ICOs to Kickstarter projects. When you contribute money to Kickstarter projects, you hope that the project will succeed and you will get the product that when they are done. The key thing is, there is no guarantee that the project will be successful. Similarly, when you contribute to an ICO, it is based on a promise from the development team, that they will be able to deliver. So yes, it is risky because there is no guarantee that the tokens you receive will worth anything in the future. If the project failed, the tokens you bought will be worthless.
On the other hand, if you adopt a mindset that you are buying into ICOs like you are funding a Kickstarter project, the risk will be much lower. Take your investment as though you are voluntarily supporting the development team and do not expect much in return. If you have this mindset, then you most likely will make a very small investment which you are comfortable with losing. At the end of the day, if the project is a success, you will then be handsomely rewarded.
What to look out for in an ICO?
So if you compare an ICO to a Kickstarter project, then the ingredients for success are similar. I am providing some key considerations below:
- Do the project team already have a prototype or a MVP (minimum viable product)?
- Is the project satisfying a need or solving a real problem?
- Who are in the team and do they have the aptitude and attitude to develop a successful product?
- Who are advising them and do they have any strong backing from big investors?
- What is on their roadmap? Is their roadmap reasonable and manageable (not too ambitious)?
If most of the answers to the above are "Yes", then more likely than not, there is a high chance of success. But in order to find these answers, you have to do your own research. I suggest reading their whitepapers and find out more about the projects through social media. You should also join their community, usually through Telegram, Discord or some other forums. Joining their community will allow you to interact or see how the team interact with others. You will have a better sense on whether the team are passionate and on the right track.
What are common ICO red flags?
With every good ICO, there is a scam. There are some ICOs that are just out to grab money and disappear. Or there are some teams that will never be able to deliver their promise. Below are some red flags that I think you should take note of when you see one:
- They are spreading FOMO for their coin. This is a sign which they just want quick money.
- They have unusually high bonuses for their coin. This is a sign which they are trying to entice people to contribute.
- They do not have much information available publicly. Lack of transparency is also a sign of scam.
- Their idea doesn't really need a blockchain.
Hodl or flip?
Once you have put some money into ICOs, the question will be, should I flip it or hodl it? For those who don't know, flipping an ICO just mean that you sell it when it got listed in a major exchange. Usually, you will get a substantial return when the new coin gets listed.
I think ultimately, if you believe in the project and you want to show support to the development team, you should really hodl (hold on) your tokens. Of course, if the price of the coin had shot up to an unrealistic price, then selling some of the coins might be an option.
Thank you for reading. Hope I have provided some insights on ICOs to you.