The Initial Coin Offerings (ICO) craze is on, with 2017 marking an overhaul in the market dynamics of crowdfunding. By end of October 2017, a total of over 200 ICOs are thought to have raised a whopping US$3.5 billion between them.
Fuelled by occasional exponential rates of return coupled with an absence of any kind of regulatory framework, according to Mangrove Capital Partners – a Luxembourg-based venture capital group – some judicious ICO research can earn you a six-month return of 1,300 percent.
ICOs have disrupted venture capital. Let’s have a look at the returns of the top five ICOs of 2017 by amount raised:
An ICO portfolio is no different from a share portfolio – a basket of ICOs is better than one. However, the risks are potentially much higher particularly given that they are largely entirely unregulated, and generally offering no legal recourse to investors in the case of fraud.
The Blockchain’s immutability also carries a downside – whilst, in traditional software development, bugs are expected, with ICOs the software implementation is responsible for handling millions of dollars through immutable transactions – and this can be problematic even with one lapse in due diligence along the development road.
In August 2017, REXmls – a real estate cryptocurrency ICO, lost 6,600 ETH (US$1.3 million) due to a ‘copy & paste’ error. It sent the coins to a wrong address.
In June 2016, DAO – a virtual assets holding cryptocurrency ICO, lost US$60 million worth of Ether as hackers exploited a coding error in the cryptocurrency.
Additionally, ICOs carry a huge risk of fraud. There have been ICOs that claim to sell a token when no such token / asset actually exists. Between a website, a white-paper and a wallet address, you have all the ingredients in place to launch an ICO. Some have done so and walked off back into the wild with the proceeds.
In September 2017, the SEC charged two ICOs with defrauding investors. REcoin – a cryptocurrency backed real estate company and DRC World – a diamond cryptocurrency company, both owned by Maksim Zaslavskiy, were charged for defrauding investors with coins backed by assets which simply didn’t exist – there was no real estate and there were no diamonds.
In July 2017, OneCoin, an India-based cryptocurrency ICO, was found to be a Pyramid and Ponzi scheme that aimed to pay returns on investments by contributions of new investors. The company now faces a penalty of 2.5 million Euros from Italian courts.
On The Other Hand
Whilst it is true that ICOs can carry serious risk, a diligent investment strategy with careful assessment of several factors relating to team, market and business of an ICO carries real potential.
Here’s a summary of things to look out for before investing in an ICO:
- Team – identity and previous experience
- Technology Track Record
- Escrow and fund vesting
- Legal entity behind the project
As with any investment, it simply boils down to identifying a legitimate, experienced, competent and talented team that is looking to pursue a promising business model. They do exist, you just have to go looking for them.
Whilst ICOs – even without anything resembling a physical product – have demonstrated the potential for exponential returns, the ultimate goal, like any business start-up, is to identify those that solve a real world problem and do so in a way that promises mass adoption. And if your ICO ticks the box for inherent token value, then you may then be looking at a solid investment.