New Projects and ICOs: How to Research and Invest

Turning a profit from an Initial Coin Offering (ICO) is within reach, but it all starts with savvy research.

Initial Coin Offerings (ICOs) are the go-to strategy for startups and crypto ventures looking to raise the bar — and their capital. They issue new digital tokens or coins to investors like you in exchange for cryptocurrency. It's a thrilling space, full of speculation, and often operating on the edge of regulatory frontiers.

As an investor, it's crucial to arm yourself with insights into what makes an ICO truly profitable. While it's no small feat to spot the next giant like Ethereum or Brave, it's definitely more straightforward to dodge the common pitfalls of a potential scam.

In this article, we're going to unwrap the essentials of ICOs, explore the risks they present, and get your regulatory know-how in check so you can chart your course with confidence.

What Is an ICO?

An Initial Coin Offering (ICO) is a way for blockchain initiatives to garner funds by releasing new cryptocurrency tokens that can signify either utility in the project or a stake in the company. Similar to how an Initial Public Offering (IPO) works in the traditional business world, ICOs are designed to help burgeoning companies secure the capital they need.

👉 But there's a key difference: unlike an IPO, taking part in an ICO doesn't grant you ownership in the company.

Also, while traditional IPOs come with a stringent set of regulations and the watchful eyes of authorities like the Securities and Exchange Commission (SEC), ICOs tend to operate in a more free-wheeling, less regulated space. This freedom can unfortunately open the door to potential risks, including deceptive projects or communication breakdowns between investors and the folks behind the project.

ICOs History

It all kicked off back in July 2013 with Mastercoin's pioneering token sale, leading the charge into uncharted financial waters. Ethereum jumped on the bandwagon in 2014, scooping up a cool 31,000 BTC in their own token sale, which back then equated to the modest sum of $18.3 million.

By 2017, ICOs had become the talk of the town, the viral sensation sweeping the investor nation. There were no fewer than 18 websites dedicated to keeping track of hot new ICOs. That May, the Brave browser left everyone in awe by bagging $35 million in the blink of an eye — under 30 seconds, to be exact. Not to be outdone, the messaging app Kik casually raked in nearly $100 million come September. By the time autumn leaves started to fall in October, ICOs had tallied up $2.3 billion in sales for the year — that's over tenfold the amount raised in all of 2016. By November 2017, around 50 ICO offerings were happening per month. In January 2018, Filecoin set a record by raising $257 million through an ICO.

But amidst all the fundraising frenzy, a few unsavory 'pump and dump' plots emerged, prompting the social media guardians — Snapchat, LinkedIn, and MailChimp — to put a damper on ICO promotions. Over in the East, Chinese internet giants Baidu, Tencent, and Weibo joined the 'just say no to ICO ads' club.

👉 As nations around the globe cranked up their regulatory game, some opted for the 'ban hammer' approach to ICOs, while others are still diligently drafting the rule book.

There's no denying that during the ICO craze, greed and the prospect of effortless money drove more activity than rational analysis of real utility and value. In retrospect, it's clear that this environment bred an unacceptable lack of integrity and personal responsibility.

So, yeah, the boom went bust.

In other, good news — the stalwart Ethereum protocol survived the hysteria, proving itself an oasis of legitimacy amidst the hype. And the earnest builders carried on undaunted, seeing opportunity amidst the wreckage, their dedication to the technology unshaken.

How Do ICOs Work?

So, as mentioned, an ICO is an event where a fledgling company harnesses the power of blockchain technology to sell tokens to an enthusiastic crowd. These tokens, units of value, can offer utility (utility tokens) or mimic securities (security tokens). The former grants you the privilege to use the products or services of the venture, while the latter transforms you into a debt or equity holder.

Utility token ICOs can be initiated by firms or individuals, echoing the vibe of reward-based crowdfunding. On the other hand, security tokens are exclusive to firms as they pertain to the issuance of debt or equity, akin to equity-based crowdfunding. When a venture conducts a utility token issue, it sells tokens backed by the promise that these tokens will serve a purpose and hold value in the future. Security tokens are viewed as securities.

While crowdfunding platforms oversee the fundraising process by imposing their specific platform rules, ICOs are independent entities. They usually set up a website that serves as a comprehensive information and guidance hub, including expert ratings. Consequently, the screening and due diligence fall squarely on the shoulders of ICO investors. This process might be less transparent, necessitate more information, and have a higher probability of information asymmetries.

Max Belitski, in his research paper, took the magnifying glass to over a hundred ICOs, identifying the characteristics that drive ICO performance. The insightful findings of his research underscore the factors that contribute to successful ICOs. These include VC backing, a published whitepaper, and meaningful engagement with the GitHub platform.

How to Research and Invest in an ICO?

Investing in any token sold during an ICO is akin to navigating a high-risk minefield. With the market still under-regulated, scam ICOs abound, and investors are left in the lurch if an ICO goes belly-up or is unveiled as a fraud. If you're gearing up to participate in an ICO, remember to add these crucial steps to your due diligence checklist:

• Scrutinize the project's team and ensure they possess a track record of fostering successful businesses.
• Peruse the project's white paper and roadmap and learn how the proposed product or service will function, including the timelines for the launch of certain features.
• Find out if any computer code has undergone a third-party audit. This could be a positive sign that the project is serious about its security.
• Be on the lookout for typos on the website. This can often be an early warning sign indicating a hastily created website with potential for scam activity.

Tokens, particularly those from successful sales, usually find their way onto crypto exchanges. Once listed, investors who missed out on the token offering can jump on the bandwagon. If a project has marketed itself effectively, there can be significant demand for its token post-ICO.

👉  However, a common trend has emerged where ICO investors unload their discounted coins onto the market to secure swift and easy returns. The aftermath of such sell-offs rarely sees tokens recover in price, which is a key reason why ICOs are less prevalent today.  

But suppose you still decide to participate in an ICO. Well, then keep in mind that a cryptocurrency's value generally sees an upward trend only after it makes its market debut. Yet, this largely hinges on the practicality and value of the token concept.

To evaluate a token's potential, you need to understand its purpose and utility. Tokens with clear real-world use cases tend to gain more stable long-term value after launch. Speculative tokens based on hype alone risk higher volatility.

It's also key to research the token distribution plan. Like an IPO, the token supply, allocations, and potential lock-up periods should be disclosed. The best ICOs strike a balance between decentralization and budgeting. If founders and early investors hoard too many tokens, prices could tank when they sell. But companies also need to reserve enough tokens to fund future development. Though there's no single blueprint, look for a distribution that aligns incentives and ensures sufficient resources.

The most successful tokens have transparent models that incentivize usage and growth rather than short-term speculation. When assessing potential, focus on real utility and fair, sustainable distribution. With thoughtful tokenomics, companies can build durable networks and value.

Once the coin enters the market, it will start to accumulate value based on demand. This is when you can begin trading your coins for other established cryptocurrencies like ether and bitcoin. Therefore, it's crucial to invest in a token that is primed for trading on crypto exchanges.

However, don't be hasty to sell all of your tokens right off the bat. A savvy move would be to retain at least 50% of your tokens for a few months before selling them again. Additionally, be aware that some companies offer bonus coins free of charge to early investors. If you're among those early birds, make sure to check whether the coins are available and grab those benefits.

Some firms provide investors with the opportunity to purchase coins presale. However, bear in mind that these presale coins may fetch a higher price. Certain popular ICOs have a whitelisting period, during which you need to register before the ICO period to secure a slot for the ICO date.

Where Can You Look Up Active ICOs?

There are a few ICO platforms to check if you’re looking for new crypto ICOs and ICO listings:

• CoinMarketCap's ICO calendar serves as a comprehensive guide to all ongoing and upcoming initial coin offerings within the crypto landscape. This calendar allows you to explore all active and imminent ICOs.
• ICODrops keeps three valuable lists up-to-date: Active ICOs, Upcoming ICOs, and Ended ICOs. Each project listed comes with useful information and analysis, making it a great resource for those wanting to stay informed about ICOs.
• CryptoRank​​ offers both crowdsourced and professionally curated research, including price analysis and crypto market news. It also includes an Active IDO/IEO/ICO listing, which can help traders make more informed decisions.
• ICO Hot List conducts research into existing and forthcoming Initial Coin Offerings. They provide a curated and always updated list of trending and upcoming ICOs, making it a valuable resource for those interested in ICOs.

Bottom Line:

When an exciting new ICO pops up, it's tempting to jump in based on hype alone. But savvy investors know — always do your homework first! Though it's an old lesson, due diligence remains critical. There are at least four critical elements that demand careful scrutiny: the white paper, the team and its partnerships, the business case, and the tokenomics. While the FOMO is real, don't let excitement cloud judgement. Vetting the fundamentals takes work but is essential to make informed investment choices. Look beyond the hype and dig into projects with a critical eye. Take the time to research thoroughly before purchasing any tokens. With rigorous due diligence, you can filter out empty promises and uncover true crypto gems.

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FAQs

What Is ICO in Finance?

ICO stands for Initial Coin Offering. It's a way for cryptocurrency startups to crowdfund their disruptive dreams. Here's how it works — a company creates a set number of digital tokens and sells them to the public in exchange for existing cryptocurrencies like bitcoin or ether. These tokens aren't just random — they serve a purpose in the startup's blockchain platform or app. The capital raised from the ICO is used to turn their ambitious ideas into reality. Investors who bought the tokens may also get special access or perks related to the product or service. What makes ICOs appealing is the possibility to get in early on innovative projects before they hit the big time. But beware — investing in ICOs is high risk. Many ICOs are for projects in the early stages without working products. Some could turn out to be pipe dreams that never materialize.