Understanding how initial coin offerings work

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Updated: 04 March 2020

Initial Coin Offering (ICO) is a relatively new term and phenomenon in the forex trading field. Trading tips in Initial Coin Offerings are limited as traders are still trying to get to grips with everything that takes place in and around ICOs. Perhaps some may not be in the know about what ICOs are – if you are one such person, this piece is going to detail everything you need to know before you start taking part in ICOs.

What are Initial Coin Offerings (ICO?)

Initial Coin Offerings operate in much the same way as Initial Public Offerings (IPOs) operate. This is to say it’s one of the main strategies employed by companies to raise money. However, the major difference between ICOs and IPOs is that when it comes to ICOs, the companies (developers of blockchain technology) are issuing digital tokens to investors while in IPOs, companies (public owned companies) are issuing shares to investors.

ICOs also differ from IPOs in that they are high-risk speculative investments in comparison to IPOs. While an investor puts his or her money into an already established entity when acquiring shares at an IPO, this is the exact opposite of an ICO as investors are putting money into a project that has not even started. If underway, the project would be at a very early stage of its development. In essence, this means that there is a huge probability that an ICO may fail to rise, therefore leading investors to lose most if not all of their funds.

Indicators of good and bad ICO investments

Anyone looking to invest in an ICO needs to conduct some research before deciding if they can put their money into an ICO. While there are a number of factors traders can look at to determine if it’s a good or bad ICO investment, these two indicators should be considered at all times. The first indicator refers to the white paper issued by the company undertaking the ICO. The white paper is essentially a document that details how the company is going to use investor’s funds; this is more like a project proposal. Like a project proposal, a white paper needs to be analyzed objectively, as some companies can mislead investors by overstating potential profits.

The second indicator refers to internet reviews. While the white paper may come as a highly technical paper to some, it’s beneficial for traders to use the internet to gauge if the ICO is promising real things or if it’s a scam. The trick here is to do an extensive desktop research in order to gather every bit of information that you can. Investors need to be wary of marketing tactics such as the use of celebrities endorsing a particular ICO as scams can also do the same.

Risks of investing in an ICO

Just like any other investment, investing in an ICO does have its own risks. One of the major risks is that investors may fall for scams. As ICOs are more or fewer projects in the pipeline, it’s difficult for investors to gauge if the project is genuine or not.

The other risk is that ICOs are largely based on popularity rather than an underlying value. This, in turn, leads to high volatility as an increase in popularity leads to the rise in the value of digital tokens while a dip in popularity leads to a drop in value.

Additionally, it’s not common but it’s certainly a possibility that your digital tokens may be stolen by a hacker online. Unlike shares in which an investor is a sole proprietary and signatory, digital tokens are an online commodity susceptible to hackers.