ICOs are the cryptocurrency form of crowdfunding. Crowdfunding provides an alternative method for companies, startups, charities, and individuals to raise money. In some cases, the crowdfunded projects go to a cause, such as wildlife preservation. In other cases, crowdfunding provides the buyer with an investment vehicle. An individual investor can research different crowdfunded investment opportunities until he or she finds one with a product and business model he or she believes will succeed.
Investing in crowdfunded business products gives average individuals the chance to become venture capitalists. Like the panel on Shark Tank does every week, the key is separating the winning opportunities from the losing opportunities. A product may be inventive, provide tremendous benefits to users, and be something the investor likes, but a great product is never enough. There must also be a plan for making and marketing the product at a price that allows for profitability. A solid business model must be in place, or the enterprise, regardless of its brilliance, will fail to generate profits, which means your investment will fail to appreciate and may even disappear entirely.
With the rise of bitcoin and other cryptocurrencies, entrepreneurs discovered that blockchain technology could be harnessed to create a more efficient method of crowdfunding. The company simply creates an electronic token using blockchain. Interested parties can then purchase the token and trade it to other investors, just like a stock.
The initial sale of the tokens is called the Initial Coin Offering (ICO), which works much like an Initial Public Offering (IPO) of stock. ICOs, however, provide individual investors with significant advantages over IPOs. Before stock shares go onto the open market, they are sold to institutional and wealthy individual investors included in the underwriter’s inner circle. These connected investors make most of the money on an IPO because they are able to fully take advantage of any price increases. Individual investors who get in on the IPO too late miss out on the gains or even lose money. With an ICO, any investor willing to do some research can find opportunities to truly get in on the ground floor.
The Initial Coin Offering period usually lasts for a week or longer. During that time, the coin is available to all interested parties. The coin must be purchased using a cryptocurrency, such as bitcoin or Ethereum. The ICO issuer may have a funding goal or funding limit. When a goal or limit is employed, the price and number of tokens issued remain static for the ICO period.
Some issuers employ a changing funding goal with a static supply of coins. In that case, the more investment the ICO receives, the higher the token’s value. The issuer can also keep the coin price level and simply issue as many coins as demanded during the ICO period.
What Drives ICO Success
For an ICO to succeed, it must be based on strong fundamental technology, advises Antonio Madeira of Cryptocompare. For example, an ICO based on duplicating bitcoins provides no new innovation to provide value. With investors finding no reason to prefer the new ICO to bitcoin, the ICO is unlikely to become profitable. When an ICO based on an innovative technology with a broad market comes up for sale, it may be a great investment. For example, the ICO for Ethereum made investors big money.
Why Ethereum succeeded
Madeira points out that Ethereum, released in 2014, provided an innovative smart contract feature. The smart contract feature provides a way for buyers and sellers to exchange goods without fear of the other party failing to live up to its end of the bargain. It uses blockchain technology in a new way that makes cheating impossible.
In the future, Ethereum’s technology may become the most efficient way to do business, especially overseas. It’s easy to see the potential. This technology could make all the paperwork of business contracts obsolete.
Not surprisingly, Ethereum enjoyed record investor enthusiasm during its 42-day ICO, held between July 20th, 2014 and September 2nd, 2014. The ICO raised over $18 million. 60,000,000 coins were distributed. The profit rose to a whopping 3900 percent.
Where to find the next Ethereum
Blockchain technology expert Jean-Etienne Durand stresses the importance of making wise selections between the ever-rising number of ICOs. He recommends using ICORating and TokenData to research offerings. These services provide ratings and research material to help separate the winners from the imitators.
ICOs are issued to fund specific projects. When you find a project you believe in, before committing your money, Durand recommends researching the company behind the project. To do this, start by studying the ICO’s whitepaper. This will give you pertinent information about the company, its strategy, plan, and team members. A project needs to be backed by a solid company. It also needs a solid team, so Durand recommends researching the team members as well. Finally, Durand recommends checking on the company’s and project’s presence on social media, through outlets like Facebook, Reddit, Slack, and LinkedIn. Strong candidates publish extensive information about their products and services.