ICOs really took off in 2017 and the momentum has continued through the first half of this year. In many ways, it looks like the sky’s the limit as investors continue to embrace this new asset class with open arms.
While investing in ICOs aren’t without risk, they have become a key part of the asset allocation strategy of many of the family offices and hedge funds – especially as more traditional asset classes become more fragile.
The numbers prove it. This year’s largest ICO topped $2 billion and even though the underlying company – Telegram – eventually gave back the money they raised, the problems were more due to regulatory issues than anything else.
This shows how important it is to pick the right ICO – after all, it is your money on the line. With that in mind, here are some tips on how to get big returns from ICOs. It doesn’t matter if your day-to-day business revolves around developing a seed to sale software suite or a bakery, you don’t want to lose money and article will give you some tips.
A Quick Backgrounder
For those who don’t know, ICOs are different from cryptocurrencies. While both are forms of digital money, the value tokens tied to ICOs are used for specific purposes in blockchain-based projects. This differs from cryptocurrencies which are used as a means of exchange in a multitude of secure transactions.
In fact, there is some risk with ICO tokens as their function is tied to the network hosting them, while most cryptos are completely independent. To paraphrase David from ‘The Droid Guy’, think of Ethereum as the internet, while an ICO token is a website.
Do Your Due Diligence
Now that we’ve gotten the backgrounder out of the way, you should be up to speed with the differences between ICOs and cryptocurrencies, let’s look at how you can make money.
Before we go any further, remember that no investment is without risk and in some cases, the risks tied to an ICO can be higher than other asset classes. As such, many professional investors who are active in the space suggest that only 10 percent or so of one’s total portfolio should be allocated to these investments – at least for now.
In terms of evaluating an ICO investment, you will want to do this in much the same way as you evaluate more traditional investments. This means taking a good look at the team, the financials, the feasibility of the project, and the competition among other things.
When looking at the team, you will want to see if they have any experience in the area. In terms of the project, you want to look at the scope and the timeframe for execution. In addition, what is the budget and how will the money from the ICO be used to finance this undertaking.
Another thing you will want to do is call the ‘Howey Test’. This test was created by the Supreme Court and is used to determine whether the proposed transaction qualifies as an investment contract under the Securities Act of 1933 and the Securities Exchange Act of 1934.
If so, then the transaction would be an offer to buy securities and as such would be governed by registration and disclosure requirements. This is important and if the ICO you are considering does not pass this test, then you should hightail it out of there.
Beyond this, you also want to familiarize yourself with the particulars of an ICO and how it works. For example, is the offering capped or uncapped? While good for the project promoters, an uncapped offering is very bad for investors as it essentially means that more tokens can be minted at any time. In fact, the best offerings are those which promise to ‘burn’ any unsold tokens. This is like how government treasuries take money out of circulation by physically destroying it.
Lastly, is ICO investing legal where you are located? For those in the U.S., the answer is yes, but the best offerings are those which go through some sort of SEC registration. By the way, this means you can check the status of the filing with the SEC and this is something you should do.
Know the Jargon
As with every industry, certain terms have started to creep into the ICO space. This includes ‘HODL’ could either mean ‘Hold on for Dear Life’ or was just a misspelling of hold, depending on who you ask. Either way, the implication is the same, you are buying these tokens and then holding them, much in the same way you would any other long-term investment.
Then there is ‘FUD’ which stands for ‘Fear Uncertainty and Doubt’. This comes into play as many ICOs are for early-stage, even pre-revenue projects and as such investment comes with significant risk. Most FUD are short-term investors and they get on board an ICO to ride the price up but at the first sign of trouble, they will be heading for the exits.
As such, knowing the jargon can help you determine how much of a roller coaster the ICO you are considering will be. This is not exactly a bad thing, but it does mean that you need to embrace the uncertainty when it comes to getting big returns from ICOs. Remember to do your research and only pick those offerings which stand up to the scrutiny.