Initial Coin Offerings or ICOs are when a new cryptocurrency project sells cryptocurrency tokens to investors. It’s not a coincidence it is called ICO as the process resembles an IPO with some key differences. Every ICO is different and I highly encourage you to do thorough due diligence before taking part in one but here are seven things you need to be aware of that apply to most of them
History
An ICO is not the same thing as an IPO but it shares important characteristics. Unfortunately, IPOs have historically delivered subpar returns. The stats show that over thousands of IPOs over a multi-decade period of time IPOs underperform random stocks. One important aspect of an IPO is that it involves insiders selling to outsiders at a time and with conditions set by the insiders. This same dynamic is present with ICOs and I think ICOs will mirror IPOs in this sense. Foregoing ICOs altogether and buying the coins in the open market at a later date when cooler heads prevail might be a superior route altogether.
No control
In tech IPOs there is a trend where companies issue shares with diminished or non-existent voting rights think Facebook, Alphabet and Snapchat. ICOs take that trend to the extreme as usually there is zero influence to be had through buying into the ICO. You don’t get to vote on anything and have zero control.
Aggressive advertising
Turn off your adblocker ahead of the ICO. Because you are likely researching the ICO there’s a chance you will be targeted with advertisements. I’ve seen this happen on several instances and it is a bad sign. The company is essentially investing its funds - soon to include the raised funds - to increase its ICO proceeds. By definition this is value destructive if you are buying into the ICO but it benefits insiders who are awarded a set allotment of coins.
No oversight
ICOs are hot because it allows companies to raise money without the difficulties of the traditional route of the IPO that is heavily regulated. An IPO is expensive but the cost of compliance with regulations afterwards continues to put pressure on companies that go public. Every year there are many companies that specifically exit the markets because they can’t survive without getting rid of the compliance burden. It makes sense for companies to want to avoid it altogether but this also means the space is unregulated. A wild west of visionary pioneers and liars standing over a hole. Ask yourself whether you are comfortable buying stocks on the pink sheets or over-the-counter? If you aren’t, why would you be comfortable buying into an ICO.
Ownership
Founders and the original development team will reserve a percentage of the coins issued for themselves. That’s actually a good thing. You want the owners and employees to make money the same way you are. If they profit through other means your interest is not aligned. At the same time the coins reserved have to represent a reasonable amount of value in comparison to what work has already been done and in relation to future prospects.
Delayed liquidity
Don’t buy into ICOs where the founders and employees can immediately turn around and liquidate their stock of free coins after the ICO. Even if you know they are good people you want to make sure your interests are aligned. A setup like this means it is theoretically optimal for the team to sell all their tokens and start the same venture with their newfound riches unburdened by a cryptocoin that forces them to share future revenue. Look for ICOs where founders and employees get issued their coins over time.
Be Early
If you are going to invest anyway. Do it early. Many ICOs grant better terms to earlybirds. Usually you get more coins for your investment. Small differences can add up when you are putting together a portfolio of ICOs