ICO: investment or unjustified risk?

Questions "What is an ICO? How to participate in it and what prospects exist for investors?" are asked more and more often, because not a day goes by without news about the launch of new tokens appearing.

The hype around ICOs today is very reminiscent of the early 2000 craze around the IPO (initial public offering). Then, like mushrooms after rain, companies related to Internet technologies began to appear.

These companies offered their shares to a wide range of people. During the 2000s, the IPO boom affected a lot of people - companies, high-net-worth investors, and ordinary people.  Most IPOs were at the business idea stage and were related to Internet technologies either indirectly or not at all. There were also outright scams.

ICO (Initial Coin Offering) is the initial placement of coins. The term “crowdsale” is often used instead.

To put it very simply: ICO is a project of a team of professionals who know how to bring a great product idea to life, implement it and earn a lot of money. This team has it all: brains, skills, ability, desire, time and a lot of enthusiasm. The most important thing is missing:  the funds to create the project.

In this case, this team of enthusiasts enters the market and appeals to a wide range of the public with a request to invest in their idea in exchange for participation in the development of the project and future profits from its implementation.

The team puts on the market the so-called tokens.

A token is the minimum unit of accounting that is used to represent the balance in the declared asset. These units are accounted for on the blockchain platform, and access to them is possible through special applications using an electronic signature.

There are three types of tokens:

Utility tokens are tokens that enable their owner to purchase certain services in the future. They are used to finance projects that previously could not receive it.

Security (“investment”) tokensare tokens that give their owner the right to realize their own stated interests. This may be the right to participate in a legal entity, in capital, profits, or the status of a creditor.

Asset-backed tokensare digital obligations for real goods or services. And this is the only type of token that is directly backed. The guarantor of the conversion of such a token is the organization itself that stores goods or provides services.. This type of token is a digital expression of a physical product or service provided. For example, one token is equal to one barrel of oil or one square meter of housing (if the ICO is declared as a construction project).

Investors purchase tokens through exchanges, exchangers or through personal direct contacts (from seller to buyer). In addition, developers of new projects often integrate traditional methods into their platforms, such as electronic wallets, through which purchases can be made. You can purchase tokens for both cryptocurrency and fiat money.

At the beginning of the 2000s, the stock market went crazy with everything related to the Internet. Now there is a very similar situation with the hype around blockchain technology. The difference between IPOs and ICOs is that the former were regulated by national laws and therefore provided investors with some minimum guarantees. ICO, in fact, is based only on trust, since its legal nature has not yet been determined.

Also, ICO, unlike IPO, is not designed to pay dividends.

If you are interested in investments such as ICO, you should be aware that more than half of such projects will never be able to bring their plans to life. And the chance that by purchasing a certain number of tokens, you are participating in the creation of the future Google or Twitter is negligible. Most of the declared “brilliant” projects never take off. In the best case, you will be able to get back your investment. At worst, debit the amount you paid for the experience. These are the sad realities of this market today. 

But if you approach this issue seriously, then through the prism of analysis and a critical look, you can consider that very pearl in a pile of garbage that will bring you profit. But to do this, it is necessary to collect all possible information about the team members and their reputation, about the projects that they have already launched, about the proposed product and the marketing policy of the project. It is necessary to remain realistic and not give in to the hype.