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With cryptocurrencies now becoming a household name, investors are starting to look into theatrical plays that can make it more out of the way. The market for initial coin offerings (ICO) offers just that, although with a bit of risk that traditional initial public offerings (IPOs) do not offer.
Restrictions on Venture Capital
If you want to make money in Silicon Valley, you need two things: connections and capital. Connections are mandatory, because many projects end up being overwritten, and it serves an advantage over many other investors. It also helps to provide assistance to the company as well as providing them with your capital (eg, advice on products, marketing or hiring). The unspoken rule is that you usually have to be located in Silicon Valley to do well as a startup investor.
Large amounts of capital are also required for regulatory and convenience reasons. Venture capital is considered highly risky and, as such, is generally limited to being accessible only to accredited investors, who must have an income of more than $ 200,000 per year or a net worth of more than $ 1,000,000.
In addition, most companies did not have the bandwidth to manage hundreds or thousands of small investors, due to meetings, due diligence and necessary documentation. It was much easier to take more investments from a small group of people and keep things simple.
Democratizing Venture Capital
For both these reasons, the number of people who have benefited from gains in huge technology start-ups has been very limited. Now, with the Icos, there is the possibility that investors can join the gains, thus democratizing the gains and spreading them throughout the country and in the world.
The possibility of making asymmetric bets (the bets where there is a possible high rise, but a limited downside) has been limited for a long time. Lottery tickets are the closest example of a purchase that can be made which could result in a 10,000x return, but with a lower limit to the size of the investment.
In a world where income disparity and the distribution of wealth are a constant source of conflict, the spread of these returns may prove increasingly important to ensure that it does not get worse.
Structure of an ICO
As Hacked readers are undoubtedly aware, an ICO generally occurs when a cryptocurrency startup wants to raise funds. They have or something they have already built, or they have a white paper outlining their business plan and how much money is needed to create and scale the project.
ICO is made by exchanging fiat currency or other cryptocurrency for the "token" in question. A token is considered equivalent to the company's equity in this analogy, although most companies claim that tokens are not securities for regulatory reasons (see: Howie test).
ICOs are popular for both investors and traders, as there is an expectation of a rise in the market price after ICO, as well as a high volatility (which traders love). Looking at a website like the coin program, at the moment you can see the amount of hype surrounding the ICOs.
Recent trends in fundraising
As ICOs become more popular, many companies are going through similar experiences during the fundraising process. Some companies are demanding such high valuations that there is a small advantage for investors and a greater chance of losing money.
If excessive amounts of money are added before a product has been built, the project poses a much greater risk. Furthermore, there are fewer investors who have invested enough money in a project to justify remaining invested during a bear market. Compare this with Bitcoin, where some have owned it since its price was in the one-digit range, and you can see the difference.
Unfortunately, projects that are heavily inflated due to ICO are losing opportunities in the longer term. Some people forget that the best-known cryptocurrency of all started using an organic extraction process rather than an ICO. Although there is almost no cash flow when this is done, it creates a rabid community of proponents who believe in the product rather than short-term speculators. This solution would not work for all ICOs, but for some it could be a viable solution.
More than a simple ICO
ICO is the best known part of the process, but often these projects require money to bring them to that point. From here come Pre-ICO and Pre Sale. The Pre-ICO is similar to the money "friends and family" with which each company begins. This is what is necessary for the project to take off. Then you have the Pre Sale, which is where the bigger investors who are going to help build the product and the profile of the companies get buy pawns at a lower price than the ICO price in exchange for their help.
Finally, and it is very necessary to clarify this point, all these projects involve a lot of inherent risks and a significant amount of research should be undertaken before any investment. Where many past IPOs had undergone a massive amount of due diligence and had supporters who understood technology, we are seeing many investors getting on the investment train without fully understanding how everything works.
Featured image courtesy of Shutterstock.
