ICO, an acronym for Initial Coin Offering, made its way to the market in July 2013. The concept was reportedly pitched in 2012 by J.R Willet when they published a whitepaper titled The Second Bitcoin White Paper.
The record of the first-ever ICO is linked to Mastercoin which was launched by him and was able to raise bitcoin worth $500,000. It was later in August 2013 when the first transaction happened on Mastercoin.
Content in this article takes a deeper dig by examining the benefits of participating in ICOs and why investors should consider them. Also, there is a detailed review of the concept of ICO right at the beginning of the following piece.
Understanding ICOs
ICOs, or Initial Coin Offering, mirrors the fundamentals of an IPO, which is an Initial Public Offering. Both aim to raise funds for projects by approaching investing. They have a set target in mind along with the offering structure which could be dynamic or static.
One aspect where ICOs differ from IPO is in terms of reach out. ICOs directly reach out to investors instead of involving an intermediary. This has its advantages and disadvantages which will be discussed later in the content.
ICOs work in two ways. One, they set a goal with a static target. It closes the door when the target is met and coins are rolled out at the previously committed price. Two, founders set a supply but keep the goal dynamic. They do close the door when the target is met but determine the price of a coin based on how many resources they have collected.
There are always new ICOs entering the market, each with varying levels of credibility and risk. Investors should approach these opportunities carefully, carrying out thorough due diligence before committing funds.
Top Benefits of Participating in ICOs
The top benefits of participation in ICOs are high returns, early access, democratization of opportunities, liquidity, and portfolio diversification.
Potential for High Returns
There is ample potential for high returns in ICOs. A well-known historical example is Ethereum, which launched its ICO in 2014 and went on to become the second-largest cryptocurrency by market capitalization. While this highlights the potential of ICOs, it’s important to note that most ICOs do not achieve this level of success, and many fail or turn out to be fraudulent. The token is even the second-ranked cryptocurrency across the world in terms of market cap, behind only Bitcoin’s BTC. Ethereum has even sustained the model of hosting dApps on the network.
Traditional investment returns, on the other hand, commit to a smaller return that investors get after considering intermediaries.
“ICOs broke down barriers by allowing anyone with an internet connection to invest in innovation—unlike traditional venture capital reserved for the elite,” mentioned Naval Ravikant, AngelList Founder & Crypto Investor
Early Access to Innovative Projects and Technologies
ICOs allow investors to join a project right from its commencement. Investors can see it developed from ground zero. Many founders even allow inventors to pitch their ideas or try the product before it is rolled out for the general public. Such a method is often associated with blockchain start-ups who have ideas to disrupt the modern and traditional market.
While investors are not founders, they end up developing positive sentiments when they see a project come to life. Most of these projects and technologies are those which are truly innovative – something that people have never heard about.
Democratization of Investment Opportunities
There are no intermediaries for ICOs. The space is pretty much open for all the investors who are interested in funding a project. This idea of a low barrier democratizes the entire process right from its initial stage. It goes on to give investors the power of making calls about what should happen, or what should be withdrawn from the project.
This is different from the process of traditional venture capital which injects funds based on a fixed plan for a commitment to receive specific returns. Developers are mostly on their own in traditional methods. That is not the case with ICOs, for it is more of a collaborative process.
Liquidity Advantages
Investors can liquidate their funds faster as compared to traditional methods. Founders do set up a timeline or phase after which funds can be liquidated. But, that is still faster than how the market generally operates. Needless to say, terms & conditions are different for each ICO offering and they should be reviewed before confirming participation.
Another advantage is that ICOs give secondary market trading opportunities. Coins that investors acquire can be traded or exchanged on a secondary platform after some time. They are not necessarily stuck on the same platform.
Portfolio Diversification
ICOs offer exposure to a new asset class. Having another coin in the digital wallet leads to portfolio diversification which only reduces the risk of relying on a single token. Since they are bought at an economical rate, the number of coins can be comparatively larger to enhance the effectiveness of return.
It also remains crucial to balance the portfolio with major cryptocurrencies to avoid major risks altogether.
Identifying Promising ICOs
Promising ICOs can be identified in the following manner:
- Evaluate the team and project by reviewing the whitepaper and roadmap. Social media accounts are crucial resources to gather information about developers and founders. Check for their past work and its success rate.
- Analyze token economics. It pertains to reviewing the allocation of tokens to different sets. Projects often end up allocating the majority of the supply to a department that fetches little to no result in the process. Hence, discouraging other departments which leads to poor performance and the closure of the project earlier.
- Assess community engagement via forums and social media. Check for transparency based on how much information is being shared. Any hint of restricting major information could be a sign of scam or fraud.
The ICO market has matured significantly since its early days, and while some projects remain innovative, many malicious actors continue to exploit the model for scams and fraud. This makes careful evaluation and comparison with other fundraising methods (such as IDOs, IEOs, and presales) critical before investing
Conclusion
ICOs remain a powerful tool for raising funds, offering benefits like early access and potential liquidity advantages. However, they also come with significant risks, including fraud, lack of regulation, and project failure. Investors should weigh these factors carefully and never invest more than they can afford to lose. Many projects are rolling out their offerings for investors to review.
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