What is an ICO, is it worth investing in it?
Recently, the concepts of "cryptocurrency", Bitcoin, ICO, tokens, etc. have become increasingly popular. And if most people are at least superficially familiar with cryptocurrencies and Bitcoin, then ICO is a relatively new concept. Let’s try to figure it out.
What is ICO
Companies see ICOs as a good way to quickly get investments for their projects. The costs in this case are among the lowest.
Investors view ICO as a high-risk investment that can bring impressive profits in a short time.
Conducting an ICO: how it works
- At the first stage, a company (or even a group of persons not united in a company) publishes a pre-announcement, puts a presentation of its project online, and “probes the soil". This stage is designed to help understand how investors will react to the company’s idea, it gives an assessment of whether people will invest money.
- If the first stage was successful, the company goes further – it publishes extended information about its project, provides White Paper, a roadmap, which includes a development plan, time frame, a story about the team, etc. At the same time, the company issues tokens (in fact, coins of a new cryptocurrency, they can cost various real amounts). Tokens are offered for purchase to everyone, by analogy with shares.
- When a company publishes information about a project, potential investors learn about it on specialized ICO platforms. People get acquainted with the information, consider a startup as a place for their investments.
- Investors who trust this company invest money, for this they purchase issued tokens for cryptocurrency. Most often, Bitcoins (Bitcoin) or Ethereum (Ethereum) are used for purchase. Sometimes tokens are also purchased immediately for fiat (state) money.
- All collected cryptocurrency is sent to a special public address. The entire fundraising process can take anywhere from a few days to several months.
- When the ICO comes to an end, the tokens are traded on the exchanges. At this stage, their price is formed, depending on supply and demand.
- Depending on the success of the idea, either the growth of tokens or their fall occurs – accordingly, for investors, this turns into either profit or loss.
What is White Paper and Roadmap
The concepts of "White Paper" and "road map" are one of the most significant in the purchase of tokens. It is after reading these documents that investors often decide whether to invest their money or not.
White Paper is a document that describes in detail the essence of the project, it includes goals, business plan, product specifics, detailed analyzes and other related things. White Paper should describe the project very well and give a complete picture. This document should not contain unnecessary water, it is more like a technical documentation. If it looks more like an advertising booklet than documentation, you should be wary, they are probably trying to splurge on your eyes.
A roadmap is a complete project implementation plan with all stages and deadlines. Sometimes the dates are not specified specifically, only the sequence of actions is prescribed. In the roadmap, it is very important to pay attention to the goals – they must be realistic and achievable, but at the same time ambitious.
ICO and IPO
The abbreviation IPO (Initial Public Offering) is well known to all exchange investors and means “initial public offering”. The concept of ICO may seem quite close to IPO, and for good reason, because the principle of ICO was copied from this model. But there are a number of fundamental differences:
For companies, entering an ICO on average costs 10-20 times cheaper. If an IPO entry will require an average of 200 thousand dollars, then an ICO entry will cost only 10-20 thousand dollars.
Return on investment
The return on investment is much shorter. In the case of an IPO, investments will bear fruit in many years – on average, the period will be from 5 to 10 years. At ICO, investments justify themselves faster, on average, up to 5 years.
Lack of control
Another advantage of the shares is the annual payment of dividends. Tokens do not provide such an opportunity.
Low entry threshold for investors
Almost everyone can afford to invest in an ICO – companies deliberately set the cost of one token very low, often below $1. Thanks to this, you can invest with literally a little free money. The situation is different with an IPO – the minimum threshold is higher, often so much that only large investors can afford investments.
Entering an IPO for companies and the process of investing funds there is not an easy task. At ICO, the same actions are easier, you can invest in a project in just a few clicks.
Access to the market
Opportunity to enter the market at different stages of the project. At the IPO, funds are collected, having already established themselves in the market and earned a good reputation. Of course, this would not have happened if the company had only a plan in hand. A project can enter the ICO at any stage – from a plan to a finished product. This paves the way for startups.
Collection of a fixed amount
Another important difference. At an IPO, companies try to raise as much money as possible in a given time frame. On the ICO, most often (but not always) they collect a fixed amount, predetermined for the project.
Advantages of ICO for investors
What reasons mainly encourage people to invest in ICO projects:
- Possibility of high profits. ICO projects can turn into very impressive profits for investors – and we are not even talking about ten or twenty times growth. The benefit can reach 10,000%, in rare cases even 100,000% or more.
- Possibility of quick profit. Despite the fact that earlier we mentioned a period of up to 5 years for a return on investment, the first profit can come much faster – already in the first week.
- Anonymity. When buying tokens, you may not identify yourself. Many consider this a serious advantage of the ICO.
- Minimum investment. As we have already said, many companies make the cost of one token less than $1, sometimes even less than $0.01. At such prices, anyone can invest, this is a good way to try your hand.
Cons of ICO for investors
As with any investment, there are some serious downsides.
- Fraud. At the ICO, it is quite easy to post information about the project, while not having the slightest desire to actually implement it. Fraudsters make a fake project, take their money and disappear. It is quite difficult to distinguish such projects from real ones only by documentation.
- High risk. In addition to fraud, there is a big risk that the blockchain project you have invested in will simply “not take off”. Less than 10% of projects are successful.
- Complete lack of legal guarantees. All over the world, legislation has not yet been adapted to regulate the ICO sphere. Therefore, you take on all the risks when investing.