ICO Investment Tips

Baozou Comment : The development of blockchain has brought about a continuous increase in ICO projects, which has brought more investment options, but also caused a lot of controversy. Because this investment method does not have a legal status, it is not an investment product, and there are various risks and extensive management. Therefore, before investing, you must understand some risk hedging methods. Of course, through the joint efforts of the entire community, ICO still has the potential to mature.

Translation: Annie_Xu

ICOs (initial coin offerings) did not cause a frenzy on Wall Street, but quietly entered the field of startup investment, attracting $200 million in capital in 2016 alone.

ICO is a new model between venture capital and Kickstarter investment models, that is, blockchain startups raise funds for corporate projects by publicly pre-selling crypto tokens to enthusiasts and investors. Investors can buy tokens on the Bitcoin or Ethereum blockchain for a limited time. ICOs usually set a deadline or a maximum amount of funds raised. Institutions can choose to set a fixed token price and issue tokens based on the amount of cash raised in the ICO; or issue a fixed number of tokens and calculate the token price based on the amount of funds raised.

The difference between ICO and IPO is that the former occurs before the company develops actual products or services; the difference from traditional crowdfunding is that participants can obtain equity or some kind of ownership in the issuing company, and can vote on corporate decisions and projects in the future.

There is still much debate about the legal classification of blockchain tokens. The report jointly released by Coinbase, Coin Center, Consensys, and Union Square Ventures contains guidance on whether tokens are securities, but lacks a clear conclusion.

Is ICO a scam?

Many blockchain startups with little more than a white paper and a website have raised millions of dollars through ICOs.

However, as many projects have failed to deliver on their promises, people have begun to question ICOs, and many experts say that such scams should be stopped.

Preston Byrne, chief operating officer of blockchain application platform Monax, is critical of crypto tokens. “The premise of ICO is incorrect. It treats crypto tokens with Bitcoin data format that can manage a fully decentralized blockchain system as an investment product.”

Preston Byrne

Byrne believes;

Many "token pre-sales" run the risk of being viewed as Ponzi schemes rather than legitimate investment products. "Even with advanced crypto investment solutions and Wall Street's backing, this fact cannot be changed. Frankly, it is surprising to see that the most savvy venture capitalists cannot see the true face of it."

Many criticisms are directed at the characteristics of blockchain itself, and the new opportunities it brings are unprecedented and incomprehensible.

Tim Zagar, co-founder of blockchain-based fund management platform ICONOMI, said:

"It seems that start-ups have the potential to shorten the entire venture capital process and sell ideas directly to potential customers," he said, adding that cryptocurrency technology can allow services to be tied to payment mechanisms and tokens in a way that has never been seen before. Earlier this year, his company's ICO raised $10 million.

However, Zagar stressed that not every startup understands the tricks. “Many times, blockchain startups are amazing technical teams, but their lack of business experience causes them to underestimate the value of market research, sales, and even a good profit model.”

Stas Oskin, a core developer at WINGS.ai, criticized that “it seems that many teams doing crypto token crowdfunding and ICOs deliberately make high promises just to raise as much money as possible, without considering the impact on their long-term credibility, especially the views of observers outside the crypto economy.”

Oskin said this leads to a bad brand image for the project, difficulty for the team to raise funds in the future, or leads to people not believing that the field is mature.

Many blockchain experts believe that investors also lack experience in evaluating ICOs and crypto tokens.

“People follow the herd mentality and don’t understand the details of the project. Many people do very little due diligence and treat investment as speculation, usually selling tokens immediately on exchanges.”

Nick Tomaino, blockchain expert at Runa Capital, said, "Cryptocurrency enthusiasts have benefited greatly from Bitcoin and Ethereum and are beginning to have too high expectations and insufficient execution in their investment decisions. These financings are based on expectations but not execution. This has been a problem that Kickstarter has had for many years, and I am worried that this will also happen in the ICO field."