I usually don’t have to convince anyone to invest in an ICO, because the people I usually talk to are, so to speak, pre-convinced. They are either part of the cryptocurrency market and well familiar with the mechanisms of an Initial Coin Offering, or they work in technology or marketing and have heard or read about the impressive ICO gains that made headlines over the past couple of years.
I was recently reminded that not all those who are looking to invest, generally speaking, live in the same bubble that I do. More recently, a lot of press has been covering the topic of ICOs, and, interestingly enough, the coverage was stimulated by two contradictory trends: increased investment amounts and decreased ICO numbers. A lot of potential investors are understandably conflicted. Add to that a technology that many find too complex (blockchain) and a currency that many are unsure what to do with (cryptocurrency), and you have enough confusion to justify inaction.
What is behind an ICO?
When you invest in an ICO, you are giving money to a blockchain company. Which is why you should be at least vaguely familiar with what blockchains and how they are tied to ICOs.
What is blockchain
Blockchain is a type of decentralized ledger technology in which transaction information and user identity are encrypted in “blocks”, together with the solution to a mathematical puzzle that can only be delivered by the computational power of a very advanced GPU or ASIC. Once the puzzle is complete and the successful terminal has hashed it (i.e. encrypted it), together with information about the previous block, the new block is validated by the network and added to the chain of previous blocks. The node that has hashed the block receives a reward in cryptocurrency.
What’s the connection to ICOs?
ICOs are launched on various types of blockchain. When you invest in an ICO, you buy the coin or token that a specific blockchain yields, as a kind of crowdfunding investment in the ICO project. Unlike IPOs, where you buy a share in the company, with tokens you are simply giving money to the ICO company so they can develop their project. In exchange for your support, you are receiving platform benefits such as service or product discounts, or discounted tokens which you can sell (hopefully at a profit) when the company launches and gets market cred.
Why invest in an ICO
An Initial Coin Offering, or token sale, is, as I mentioned before, not quite the same thing as a crowdsale. But it works along the same principle: if the company succeeds, you win. The better the company performs, the more gains you can expect to derive.
Don’t invest in an ICO because you like the project. Don’t invest in an ICO because you like the people behind the project. Invest in an ICO because you believe the project will make money (not directly for you; but if it makes money for itself, you will benefit, too). Let’s be honest: that’s why we invest in anything. If we believe in a cause, but don’t expect it to make money, we donate.
After all, the best and very recent example is the Civil ICO. It was a worthy project that aimed to support independent journalism. It had a great team and several already active hubs. However, it failed to raise the $8 million it wanted – peanuts in ICO or venture capital money – because investors did not believe the project was going to make money for them. On the other hand, many asked Civil founders to keep their initial investment rather than refund it as a token (ha!) of support for the project. Donation versus investment.
How an ICO can make money for you
That’s, then, the basic question that you should ask yourself before you click the Invest button, so to speak. What return on your investment can you expect to make and in what form?
The first type of return is, in fact, returns on the token itself. If you buy the token and hodl, you might end up with something like 65,000% returns, as in the case of Ethereum. Sure, that’s ETH’s growth in five years, but the price sat well above its current $202 (at $1,400, to be more precise, during the bull market of December 2017 and January 2018).
That is, of course, an outlier, and there are more tokens that see modest growth. Most tokens never rise above $1, but, considering the price during the token sale is often something like $0.004, you could still get a 10,000% ROI.
On the other hand, very few people hold tokens for years; you should consider returns over much shorter periods of time. How do you know if there are going to be any? Well, you don’t. But you can assess the project and see if there is a market for it and the right team to build the service or product, and then trust your gut, your market savviness, and the market itself to do the job.
The other type of return you can expect on your investment is platform discounts and benefits. For the Binance Coin, for instance, there are discounts of up to 50% on Binance fees, as well as buybacks to burn coin and increase value.
Such discounts and benefits are, in fact, the most immediate type of return. As with anything, it is dependent on the success of the platform, but less so than in the case of trading.
How much money do ICOs make?
Well, at least cumulatively. There are afew ICOs that made literally billions on their own, notably EOS ($4.1) and Telegram ($1.7) at their ICO closing in 2018. However, that is not common, as you canimagine. (Also, in all fairness, Telegram didn’t quite play its hand straight,with a presale that was over before it began.)
TaTaTu, a European blockchain video platform, raised about $575,000,000 with lots of hype and some celebrity endorsements. Neluns’ ICO closed early in October, which was expected to be a slow month for Initial Coin Offerings, with $136,000,000 raised. Not bad.
As with any investment, when you invest in an ICO you take on a risk. If the ICO fails to raise the amount, the crypto invested returns to you. If it raises the necessary amount, but fails to complete the project, you lose the investment. If it pushes the product and has no success, you lose the investment. But if the project succeeds, you stand to gain both in the long and in the short run.
What you can do before you invest in an ICO, however, is perform due diligence on all aspects of the ICO. This way, you will minimize your risk and increase your chances of actually making money off of your investment.
All in all, 2018 saw over $21 billion invested in ICOs so far, in a year that many will say was not ideal for cryptocurrency in general, and tokens in particular. If anything, that shows investors large and small have faith in this token sale system, in blockchain companies and in cryptocurrency in general.