In 2017, Initial coin offering (ICOs) collectively raised 7 billion USD. Whereas, only halfway into 2018, ICOs have not only surpassed but more or less doubled the total 2017 market with 15 billion USD. Another interesting reality is that in 2017, ICOs also exceed the traditional VC-style funding for the Internet companies.
On the other hand, even though ICOs raised so many funds in 2017, more than half of them have already failed and reportedly shut down. Still, multiple new ICOs keep coming to the market, as many as 1,388 have been published on the various listing sites so far this year.
Good investment decision: Cash, Bitcoin, or ICOs?
Next, we are going to take a look at which would be the best investment decision: to keep your money in cash, to invest it in Bitcoin (BTC), or to invest it in ICOs in the last 18 months.
Cash, Bitcoin, or ICOs? 2017 and first half of 2018
The very best bet for 2017 was, of course, to invest in ICOs. ICOs were successful in 2017 and turned out to be the best investment for 10 out of 15 investment decisions in the past months. For 2018, the picture has completely changed, seeing the market in a persistent downward trend since the start of the year. So, the best bet for this season was to keep it in cash.
A report revealed another interesting fact that the best time to invest in ICOs is in a free market (i.e., when the market is going down). This makes sense since ICOs are the least correlated to the movement of Bitcoin, Ethereum and other crypto currencies.
Boston College Report
Boston College presented an interesting report, having conducted an analysis of over 4,000 ICOs.
They found out that the mean return for an investor was +83%. And this is an overall average, including all the ICOs that did not list their tokens in the first two months but instead valued them at zero. Beyond, they averaged the amount that was invested with an average return of each individual investor.
Furthermore, they checked how much an investor would receive after holding the ICO tokens for a period of a month after the start of the initial trading. Such investor would still gain +49%.
However, for those trying to get the best out of their ‘defy,’ the best strategy turned out to be flipping the token (i.e., selling the tokens immediately after they start trading).
Lastly, the study revealed that the SEO checker average holding period (i.e., the time required before the tokens get listed on the market, so they can be sold was only 16 days. Now, in these 16 days, the investors had an average return of astronomical +178%.
Here are 5 facts about ICO tokens and how they work;
Any “One” can hold ICOs
One of the most engaging characteristics of an ICO is that any “one” can use this method of raising funds be it an individual, partnership, a company, or even a Decentralized Anonymous Organization. As long as the team (or one person) behind the ICO have the technical capacity to create tokens, no inherent restriction could deny them the opportunity to crowdsource a Bl
ockchain venture. Additionally, the folks running the ICO are not required to identify themselves (and neither are the investors).
The first Decentralized Autonomous Organization (DAO) has already died. Launched in April, 2016, the first DAO, simply called “The DAO”, attracted more than 11,000 investors who contributed more than $150 million worth of ether to the ICO. The project was a smart contract system built on Ethereum and was to function as a community-managed venture fund. Sadly, The DAO got hacked, and the project ended after a hard fork was executed to retrieve the lost all their funds.
Tokens can be very different
Blockchain technology is still very young, and our knowledge about tokens and how we differentiate them is still small. Every new Blockchain and every new application layer will bring about something different, requiring us to reshuffle our thinking. Yet, recently, there have been developments on ways to differentiate between tokens.
Native, Intrinsic or Built-in Tokens
These tokens are native to the Blockchain, with the best examples being Bitcoin and Ethereum. Technical characteristics aside, these are digital currencies, in which encryption techniques are used to regulate the issuance of currency units and verify the transfer of money.
Native tokens serve a dual purpose:
- a) As block validation incentives (“miner rewards”);
- b) As transaction spam prevention.
The logic that supports this is that if all transactions are paid, it limits its potential for spam.
Application or Utility Tokens
The application tokens work on Ethereum and can be issued on the application layer through smart agreements. They are usually called complex DAPP tokens or complex DAO tokens. These tokens are services or units of services that can be secured. The simplest way to put them in some context is to look at utility tokens as Application Programming Interface (API) keys used to access the service. Utility tokens represent a way to fund projects and are sold in token sales (ICOs) in trading of digital currencies.
Asset-backed Tokens (and can be Tokenised Securities)
These tokens are the digital equal to physical assets. They can be issued onto a Blockchain by a company for later saving. All transactions of these tokens being passed between folks are recorded on the Blockchain. To claim the benefit, the token owner sends it to the issuer, and the issuer sends back the asset.
It is very important to note that tokens can represent any asset: an insurance policy, a fiat currency (dollar, pound, euro, etc.), a promise of a product during a crowdsale or more.
Red flags exist
When it comes to ICOs, the typical dialogue concerns picking out the “right” (potentially most successful) token launch. And no one seems to be talking about the less sexy but equally important or maybe even more so aspect of not falling for a fraud. It is becoming apparent that the current “cryptomania” has attracted a wide range of individuals, from those truly in awe of the new technology, to opportunistic con artists keen on making a quick profit. Are there any caution signs you should look out for? Yes, but they are very subtle.
Lack of publicity. There could be several possible reasons causing the shortage of publicity:
- a) The project is still very new and the media has not picked up on it yet;
- b) The project is not very engaging or has little potential;
- c) The people behind the ICO project do not want the publicity to avoid being snuffed out when the eventually make a run for it. As just one piece of a puzzle, this factor will give you further insight when you combine with other red flags (see below).
Not disclosing the team: While the team running the ICO is not usually required to identify themselves, it is more than cheeky to ask for funding without even showing your face. It should immediately be a scorching-hot red flag. Is the team hiding because they are not qualified for the job? Or are they linked to past crypto frauds? Do not follow the crowd, Do Your Own Research DYOR!
Poorly written whitepaper: Do you think Venture Capitals (VCs) would invest in a startup that fails to deliver an effective pitch? Or worse, use someone else’s pitch to get the money? The whitepaper is the ICOs opportunity to shine and satisfy you to back them with your own assets. Do not take the poor quality too lightly. If the team cannot be bothered to write a well-researched white paper, why should you bother reading it?
None of these factors screams “fraud” if you look at them in isolation. But if you combine all the bits of information accessible to you and step back to look at the bigger picture, you should be able to identify dodgy ICOs from a mile away.
ICOs are not legal everywhere
China was the first country to ban ICOs, stating that the fundraising method has “seriously disrupted the economic and financial order.” A committee led by China’s central bank is due to inspect 60 crypto currency exchanges and produce a report. In the meantime, ICOs are illegal in China.
The forceful measure was driven by concerns that some ICOs are financial scams and pyramid schemes. The Chinese companies are believed to have raised $383 million funds from 105,000 investors during the first half of the year.
A recent caution from Singapore’s central bank echoes the same considerations:
“ICOs are vulnerable to money laundering and terrorist financing risks due to the anonymous in nature of the transactions, and the ease with which large sums of funds may be raised in a short period of time.”
While Singapore has not taken any strict legal action yet, South Korea has followed in close footsteps behind China banning ICO token sales. South Korea’s financial regulator decided to suspend ICOs as a fundraising tool as the government believes it contributes to such issues as increasing financial scams. “Raising funds through ICOs look to be on the rise globally, and our assessment is that ICOs are increasing in South Korea as well,” the regulator said to Reuters. “There is a situation where funds have been flooded into an unproductive and speculative direction,” Kim Yong-beom, vice chairman of the FSC added.
Tokens could be securities
There has been quite a bit of confusion shrouding the utility token issued during ICOs, since the US Securities and Exchange Commission (SEC) announced that any token that cannot pass the Howey result should be considered a security and fall under the 1934 Security Exchange Act. The Howey test consists of the following questions:
Is it an investment of money?
Is it in a common enterprise?
It’s for profits to come solely from the efforts of others?
The universal understanding is that if a token is issued to finance a future customer’s purchase, then it should not fall under the definition of securities because its purpose is to facilitate the purchase.
But then again, other jurisdictions like France, Switzerland and some other countries seem to be showing progress with their regulators being more in tune with the industry in comparison to what pertains in the US. These countries have been working quite closely with the industry and even being engaged first-hand and as such have got a better grasp of the market and this is commendable.