What is an ICO?
For those of you who are unaware an ICO stands for the Initial Coin Offering and is similar to an IPO in stock market (Initial Public Offering). It means that you can buy a coin, token or a stock before it goes public. But the difference is that in case of hottest companies like Twitter, Snapchat of Facebook there were no option for a private investor to invest early, unless he was really big.
Those investments are covered by a private equity funds called Venture Capital, which are focused on picking an early stage, promising projects aka startups, usually in high tech industry. However in case of an ICO there are no limitations and everybody can join and reap the rewards. You can feel almost like Tim Draper, famous VC investor from USA, which unsurprisingly announced that he will participate in an ICO this month for the first time:
,,Draper, an early supporter of bitcoin and its underlying blockchain financial ledger technology, told Reuters in an interview he will for the first time participate in a so-called "initial coin offering" (ICO) of Tezos slated later this month.”
http://www.cnbc.com/2017/05/05/billionaire-investor-tim-draper-backs-new-cryptocurrency.html
Recently I had undergone a survey among the polish cryptocurrency community about their interest end experiences with ICO's. What I found surprising is that 90% of them have never ever participated in an ICO. And almost nobody is doing it frequently.
Why I prefer ICO
Rather than the projects that are already listed on exchanges. Many of the projects you can find on Coinmarketcap are from the pre ICO times where there was just an announcement that on day X there will be start of mining of that coin. Usually the creators premined some of the coins and the rest was just mined out by users. Then trading started and the price discovery process had begun.
Then we have projects that had an ICO but are now listed for an iteration of the offering price. What I am trying to say is that in terms of the projects that are already being traded it's hard to value them. If the Ripple coin was worth 200 million dollars just 2 months ago but now it's worth 5 or 8 billion, it does not mean that this value is backed by some strong fundamentals. It's the last trade price multiplied by the number of tokens. Think of traditional stock exchanges.
Now going back to ICO. When you invest into an ICO it's worth what it's worth! If a project collects 5000 bitcoins it's worth 5000 bitcoins. They have that hard value and from now on it can only grow, right? So the first benefit of an ICO is that it's really unlikely to be worth less when it hits exchanges. The only exception is when the amount held by creators is unproportionally bigger than the amount offered to investors. Then we get fake pricing like Gnosis where the creators offered just 5% to the investors, artificially pumping the value on the market.
Another risk factor is overfunding, if everybody buys during the ICO then there is no demand after hitting exchanges and price can drop below the value of collected tokens. The bigger % of ownership is offered to the public, the better. In optimal situation vast majority of coins is offered to the public because after all the creators are getting the money (BTC) to develop the project! Of course ownership of founders is beneficial for the project to some extent because it gives them an incentive to grow the value of the project.
Nowadays ICO crowdfunds end up with an average of 5 000 000 USD, in extreme cases going up to 10 - 15 million area. Now compare it to the market cap of the tokens that are already being traded. 5 millions USD barely places you in the TOP 100 where we can still find some ,,coins" from the DOGECOIN era! Usually completely worthless crap. Often projects introduced as ICO are in far more advanced state of development then the ones already sitting in exchanges.
It all sums up to a conclusion that risk/reward ratio of investing in ICO vs buying coins that are already listed is incomparably conducive towards ICO. But...
Common risk factors
Fraud - creating an ICO is a fairly easy money grabbing scheme so many scammers utilize it. Although now it's less and less common because of higher community standards (escrow, dev Linkdins, whitepaper, credibility etc). There could be two types of fraud. In ya face fraud where the scammer is vanishing with collected funds and more legit ones where there will be some sort of development but only to burn the funds and at the end dump remaining on the crowd.
Underfunding - when a project is not able to collect enough money, although underfunding can be beneficial to some extent (more people will buy on exchanges driving the price up) but extreme underfunding can lead the project to fail.
Overfunding - again it can be an advantage because the project gets more shoutout in the world thus bringing more potential buyers later but extreme overfunding usually leads to price stagnation (no more buyers) and dump caused by impatient hot money. Good example of extreme funding is the infamous The DAO which ultimately failed.
Opaqueness - in times of market euphoria people are less likely to look into the fundamentals, carefully read whitepapers and some doggy projects are more likely try to cheat people with unrealistic claims aka ,,we will do something great", a wheel of perpetual motion or he next Facebook, Google you name it.
FOMO - some ICO's can finish crowdsale in the matter of minutes not even hours as we have seen with TokenCard or Gnosis. Both of the projects collected over 10 million dollars each in around 10-20 minutes.
Promising ICO's right now
MobileGO
Crowdsale status: overfunded
Strengths: it's 100% legit extension of GameCredits (GAME) with reputable team and working project, aiming to steal market from Google Play and App Store
Potential: low to medium profit
Funding progress: 13 800 000 USD
Days left: 16
Website: https://mobilego.io/
EthBits
Crowdsale status: underfunded still on a verge of red and green zone between being extremely underfunded to just underfunded
Strengths: will pay fees to token holders, new exchanges are always a good thing for crypto world, max cap
Funding progress: 12 000 ETH (1 000 000 USD)
Days left: 4
Website: https://ico.ethbits.com/
EncryptoTel
Crowdsale status: averagely funded
Strengths: the idea itself, legit team, max cap 3 000 000 USD
Funding progress: 2 700 000 USD
Days left: 22
Website: http://ico.encryptotel.com/
What is IOU?
I Owe You. Let me quote Liqui exchange here:
IOU market is about trading coins purchased by traders in the ICO and that so far have no own network. Until recently there has been no possibility to trade such tokens (no network – deposit/withdrawal doesn’t work). But Liqui team has found a solution: when a trader/investor participates in ICO indirectly but through our platform (all transaction IDs are of course provided to developers’ wallets) – we can credited the balance of the relevant coin to them once the crowdsale is over!
Therefore, trading begins hours after ICO and there’s no need to wait until coin developers release the network (which often takes months). Or you can just keep the tokens on the balance (like it happens in any ICO) and once the network has been released – witdraw them. When the network is ready – IOU flag disappears from the relevant pair and then this pair functions as an ordinary coin.
source: https://liqui.io/IOU
Trading IOU
Another exchange offering IUO tokens is https://openledger.io/. One of the most anticipated projects which is still only avaiable as an IOU is DECENT (https://decent.ch/) which held the ICO so far ago as September last year!
DECENT is available in form of IOU tokens on both Liqui and Openledger:
https://liqui.io/#/exchange/DCT_BTC
https://openledger.io/market/OPEN.DCT_OPEN.BTC
Keep in mind that trading IOU tokens is risky due to low volume.
If anything in this article is unclear to you or you have any questions regarding the topic of ICO and cryptocurrencies then feel free to ask me in the comments.
In my next article I will cover upcoming ICO's worth watching. Stay tuned and follow me if you are satisfied with quality of my article. Thank you.
Images courtesy of http://icorating.com/