ICOs – the evaluated risk

When it comes to ICOs, otherwise knows as Initial Coins Offerings, the idea is a derivative of what is known as Initial Public Offering (IPO), that is to say, when a company that wants to be listed on the stock market, makes an offer so the public invests. We can think of ICOs the way we think of crowdfunding. In this case, it is not about buying shares in the company, but rather a company which comes up with a concept and issues a white paper about it. The company will then use a crypto-currency, such as Bitcoin, Monero, Ethereum,.. in exchange of a certain amount of money that investors will inject into their business.

From the beginning a question arises — how safe is it really to invest in ICOs ?

In a recent response to a comment by US Securities and Exchange Commission Chairman Jay Clayton, stating that market professionals should act responsibly, they should hold themselves to high standards with regards to the current initial coin offering space, CoinList CEO Andy Bromberg made a point in drawing the attention of investors by cautioning them against a risk of fraud when buying into ICOs.

Uninformed investors are indeed more at risk of falling prey to a phenomenon otherwise known as astroturfing, which describes the act of creating several fake accounts (twitter, youtube, reddit, etc…) in order (in the case of ICOs) to put forward a random new crypto-currency. On the other hand, ICOs are essentially ideas of projects and if one does not do their research on the company and the product, one runs the risk to never see the return on investment. Indeed, the failure rate for new businesses is around 80% within the two first years. What’s more, nothing guarantees the value of the crypto-currency that’s traded.

Another point that supports Mr Bromberg’s statement are preferential economics, as there are indeed pre-ICOs rounds and even pre-pre-ICOs rounds that are held. Thus the investor who comes across the ICO does not always get the best deal. One thing to avoid is to buy into the hype and rush to invest a large sum of money into a new currency. Investment should be done consciously and over time. Generally speaking, before one invests in a given ICO, one should seek professional advice and find out as much as one can, about the company issuing the offering :

  • Is the company’s protocol easy to understand?

  • Can it be summed up in plain language and preferably in one sentence (what does it do exactly)? How valuable is the protocol?

  • How big is the targeted market? Is there a real demand for this type of product?

  • Does it bring a response to a real need?

If indeed the vast majority of digital coin offerings are scams, most of those scams can nonetheless be avoided through information, dialogue and good legal counsel. For more information on crypto-currencies or if you have fallen victim to a scam, our dedicated team of experts is happy to assist you. Get in touch !