Initial Coin Offerings or ICOs are an event where cryptocurrency projects sell cryptocurrency tokens to investors. It’s not a coincidence it is called ICO as the process resembles an IPO or Initial Public Offering, with some key differences. Every ICO is different as well and I highly encourage you to do thorough due diligence before taking part in one. Here are seven things you need to be aware of that apply to most of them.
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.
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 no way to get on the board.
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 sinking its funds – soon to include the raised funds – into advertisements in an attempt to increase its ICO proceeds. This is value destructive behaviour and hurts you if you are buying into the ICO but it benefits insiders who are awarded a set allotment of coins.
ICOs are hot because it allows companies to raise money while circumventing the difficulties of the traditional route of the IPO which is heavily regulated. An IPO is expensive in itself but the cost of compliance with regulations afterwards continues to put pressure on companies that go public.
Every year there are several small companies that specifically exit the public 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 it also means the space is unregulated. It is a wild west of visionary pioneers and frauds.
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?
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.
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.
If you are going to invest anyway. Do it early. Many ICOs grant better terms to early birds as a reward for doing the legwork, taking the risk early and leading the pack. Small differences can add up when you are putting together a portfolio of ICOs.