The Risks of Investing in ICOs and Tips to Mitigate Them
ICOs are largely unregulated and have inherent risks which you need to be aware of as an investor. In this article we take a look at some failed ICOs and some promising ones...
ICOs or initial coin offerings are all the rage these days and have managed to raise over $1 Billion this year. Even though the SEC recently ruled that tokens were to be treated as securities, the uptrend in ICOs continues as they fast become a favorite for startups looking to raise funds in literally ‘seconds’.
That being said, there is no denying that a vast majority of ICOs in the past have been dubious to say the least. Some were outright frauds while others left investors with worthless tokens that eventually died.
As a potential investor in ICOs, you need to understand the inherent risks of taking part in such an unregulated, high-stakes investment opportunity. Today we’re going to look at a few cases of failed ICOs vs some of the more promising ones along with tips for mitigating your risk performing preliminary due diligence.
The DAO – An Example of the Risks in ICOs
When you talk about ICOs, The DAO comes to mind as it was one of the biggest drivers of change in the crypto and ICO arena. DAO or the decentralized autonomous organization was based on the Ethereum blockchain and saw roughly $150 million in investment from over 11,000 investors.
Unfortunately, there were security flaws in The DAO’s code, which led to a massive hack with $50 million worth of Ether being drained. Ultimately this led to a hard-fork in the Ethereum blockchain, resulting in what we know today as Ehterium Classic (ETC) and Ethereum (ETH).
The DAO was subsequently delisted and was a major setback to investor trust in crypto and serves as an example of the risks associated with investing in ICOs. There are a lot of factors in play, from the actual vision behind a token to its marketing and essentially the quality of programming that goes behind it.
A lot of investors fail to truly realize that most ICO tokens are in very early stages of conception and even if development work has started, it usually needs a lot of time before it can be ready for mass scale usage.
Beth.jp – A High-risk ICO that Eventually Failed
Another recently failed ICO is Beth.jp, which is still operational but has far too many complaints from investors. Here is an excerpt from their website:
“Beth is the first ever closed-end fund focused on applying the latest advances in deep learning research combined with financial expertise. Beth will provide an opportunity for anyone interested in being part of a new generation fund that will reduce the risks and complications in favor of using Deep Learning techniques. We are developing complex trading models and strategies with the possibility of learning, developing and improving over time. Beth is a level above the conventional solutions and will allow obtaining great returns of the investment from the first days thanks to the technology that is behind her.”
If you go through this, you’ll see there is nothing meaningful in there and it’s all just a mix of buzzwords. We are supposed to believe that Beth is some kind of artificial intelligence utilizing deep learning and essentially managing a fund for great returns on investment.
The software or ‘Beth’ isn’t even ready yet and there is no roadmap provided. Even the team behind this ICO isn’t public and the last communication from them was in June. Sadly, these are telltale signs of a dubious project and investors should have been wary from the start.
Recent reports indicate that investors have not received their tokens and there seems to be no activity on the development front either.
Tezos ICO – A Promising ICO for Investors
Let’s talk about the $200 million Tezos ICO which has garnered a lot of attention. The team behind Tezos claim that this crowd-funded blockchain:
“...facilitates formal verification, a technique which mathematically proves the correctness of the code governing transactions and boosts the security of the most sensitive or financially weighted smart contracts,”
Support of major investors like Tim Draper also managed to get Tezos off the ground really fast and the project appears to be going strong. The team is obviously talented (but inexperienced) and as with any ICO, a lot of the goals and roadmap objectives are uncharted waters.
However, if you’re looking for a solid ICO at the time of writing, Tezos is definitely at the top and has a lot of things going for it.
There are obvious claims of similarity between Tezos and The DAO, but they don’t hold a lot of merit. Firstly, DAO depends on the stability of Ehtereum, which itself has seen a few shocks in recent months.
Secondly, Tezos is a decentralized blockchain itself, and competes directly with Ehtereum, avoiding its governance issues by democratizing protocol and consensus algorithm upgrades.
This is a key advantage of Tezos, especially given the recent BTC hard-fork hype, because Tezos blockchain can be upgraded without any forks with consensus – making it more flexible and decentralized than BTC or ETH.
How Tezos (XTZ) will fare in terms of market cap and value in XTZ/BTC and XTZ/ETH pairs remains to be seen and will heavily depend on their marketing efforts.
BAT ICO – A Successful ICO with Use-case Problems
Another ICO that got a lot of attention was BAT, or Basic Attention Token, developed by the co-founder of Mozilla and Firefox and backed by major funds. BAT attempts at changing the current advertising model with attention based tokens that can be exchanged between advertisers, publishers and users on a platform called Brave.
While the ICO went really well, generating over $35 million, the value of BAT fell afterwards as most investors sold the token amid doubts in its use-case and effectiveness.
BAT is still promising however and most of the initial investors profited majorly from trading at its peak. New investors can get in at a low-price point but it is recommended that they wait for more development and real-world tests.
Tips to Identify and Avoid High-risk ICOs
ICOs are basically fund raising exercises for undeveloped software and ideas which are typically presented via white papers. You don’t really have to be a tech guru to understand the value a certain token brings (and if you can’t understand it, it means the team behind it is doing a poor job).
If you read through the white paper or their mission statement and don’t find anything of actual value, you have yourself a red flag.
The next step should be checking the team behind the token. The token’s official site usually mentions team members, but you need to cross check on major social platforms like LinkedIn and Twitter to make sure the team is legit.
Finally, you need to understand the purpose of the token and the roadmap towards that goal. Most dubious ICO don’t have roadmaps, and even if they do, they are very vague and at times impossible to manage even with a team working on them 24/7.
Due diligence is your responsibility before investing in any ICO and a good place to get a picture of what the community thinks is Reddit.
They say if it’s too good to be true, it probably is, and that goes for ICOs as well. Don’t fall for jargon and speculative mumbo jumbo. High-risk ICOs bank on your fear of missing out.
How has your experience with ICOs been? Comment below to share your thoughts and recommend any upcoming ICOs you feel have potential.