Bitcoin hit another record high this month. The world’s largest cryptocurrency by market capitalization rose above the $5,800-dollar mark on October 13 though it has since dipped back by nine percent. Despite some dips, bitcoin has enjoyed a tremendous rise in price since its launch in 2009. Many probably regret not investing when bitcoin was worth just a mere fraction of a cent. Even if one invested at the start of this year, the effort would’ve still yielded an astounding 480 percent gains.
Other cryptocurrencies are also rising in value. Ether, the token from the Ethereum blockchain, is now second by market cap despite only going live in 2015. Ether currently trades at around $300 but used to be priced at just 35 to 40 cents during its introduction.
Developments in blockchain, the distributed ledger technology that powers cryptocurrencies, now enables other developers to create their own smart contracts – computer programs that record the terms of agreements and automate their fulfillment. This functionality eventually gave rise to initial coin offerings (ICOs) as a means of funding for blockchain ventures.
ICOs are like traditional initial public offerings (IPOs), but instead of stock certificates, companies offer their own cryptocurrencies. A recent report by The United States Securities and Exchange Commission cited that coins are to be considered securities. However, unlike in IPOs where companies have to display a level of success and sustainability, ICOs can be conducted by just about any startup with a short lead time. ICOs can also yield major results. Startups like Filecoin and Tezos scored funding from ICOs north of $200 million each.
With the abundance of ICO opportunities, investors may be thinking if these are worthwhile opportunities. There’s always a possibility that one of these cryptocurrencies could be the next bitcoin. The opportunity to get hold of coins at introductory prices of sometimes just cents to a coin may be too tempting for some to pass up.
Growth of Cryptocurrencies
There certainly are draws to investing early in these ventures. Aside from the rise in the value of the top coins, cryptocurrencies are expected to gain wider use. The emergence of new smart contract platforms lowers the barriers for other companies to enter the blockchain game and allows them to start accepting cryptocurrencies as a mode of payment.
For instance, Jincor is a blockchain platform that seeks to simplify implementation of smart contracts and cryptocurrency payments in organizations. Through the platform, even those without internal blockchain expertise will be able to manage coin payments and contracts with ease.
Jincor even provides legal expertise to help companies navigate compliance as crypto activities vary in legality across territories. Such a platform would enable even non-tech companies to adopt blockchain. As more businesses adopt blockchain, the utility of cryptocurrencies will also increase.
“The volume of commodity-money transactions is much larger in the business sector than in the consumer one. The evolution of the ecosystem will encourage companies to use cryptocurrencies for corporate needs and, therefore, transfer digital assets turnover into mainstream trend,” writes Jincor founder Vlad Kirichenko.
Performing Due Diligence
Like any investment opportunity, investors must approach ICOs with a degree of caution. Like stock trading, betting on a particular industry or business entails risks so investors must perform due diligence in studying what these companies truly offer.
Typical business and market viability questions can be used to scrutinize these startups. What industries are they targeting? Are they addressing a specific market need? Are they offering a unique solution or building a revolutionary technology? Is it clear how they intend to make money? Who are the people behind the ventures? Are they the best in the world at what they do?
Most startups holding ICOs are at very early stages. Many only even have concepts outlined in white papers while others are looking to ramp up their development. ICOs are supposedly a godsend to many such projects since ventures could secure funding much faster through ICOs compared to venture capital or business loans. This said ventures with existing products or at least working proofs of concept carry less risk for investors.
Strong performance in an ICO is not an indicator of future success either. The concept may have drawn attention from other investors, but the team’s ability to deliver is another matter. Tezos, for instance, raised $232 million in its ICO but is now embroiled in controversial in-fighting between its officers that has put the whole project in jeopardy. If a company folds or fails to deliver, investors may have a hard time getting back their investments or even lose them all.
Taking the Plunge
So, going back to the question, should smart investors consider ICOs? The short answer is yes. Why not consider? Smart investors would scrutinize any investment opportunity that comes their way rather than readily dismissing it. Blockchain is emerging to be quite the disruptive technology across a variety of industries which could give rise to game-changing ventures. Performing due diligence and discerning one’s appetite for risk is necessary to see whether an ICO is worth the risk.
Those interested to participate in ICOs must also investigate the legal issues concerning investments. In the US, only registered investors are allowed to participate and companies must also comply with SEC regulations, this is why some ICO sites would have warnings regarding participating as US citizens.
The safest bet when investing in ICOs is to diversify and not put everything in just one investment vehicle. The volatility and quick rise of cryptocurrencies may be a huge draw but there are also real risks. It isn’t smart to gamble with rent money, retirement, or college funds.