In the exciting (and highly volatile) world of “crypto” currency, one idea that seems to have been gaining momentum over the past few years is that of the “ICO”.
Surprisingly (not) similar-sounding to the “IPO” (Initial Public Offering), an “ICO” (Initial Coin Offering) is a new way that some startup companies have taken to try and raise funds for their ideas.
Regardless of what you think about ICO’s, the facts are plain for everybody to see – they are unregulated and capitalizing on the “crypto” craze that’s washed over the financial world like a tsunami. The reality is that these “Initial Coin Offerings” are mostly a waste of time, but there are several with a modicum of promise.
As such, you’ll want to consider whether any of the “ICO’s” you may be interested in could be a scam. This tutorial aims to not only do that, but to also highlight how these work and where the “money” comes from with them… check out this example.
Show Me The Assets…
Before we begin, let’s explain how an “IPO” works, or any transaction in the financial world for that matter…
What you’re “buying” when you make an investment is an asset. One that you need to keep secure.
Assets come in all forms, shapes and sizes. But they have one thing in common – they make money. In other words, they are forms of production which – in some form or another – are able to produce things (either products or services) which other people can buy.
Because the asset is able to create these products, they have what’s known as “intrinsic value”. This value is determined primarily by the revenue & profit the asset’s productive capacity is able to produce, allowing the “market” to determine whether they are something worth buying.
Businesses, entrepreneurs and financiers are all involved with the trade of assets. Whilst most assets are kept in private ownership, there are some times when the company may feel the need to raise money on the “public” markets (IE “normal” people can buy “shares” in their asset).
To offer a company’s “shares” on the public market, the company needs to find an underwriter, in the form of a bank, who are able to set the asking price for the shares at sale day, and thus are able to validate the underlying “value” of the company’s assets. This process is known as the “IPO” and is used to free up “capital” in an asset which may have received a lot of investment already, but just didn’t have the ability to keep it liquid.
Be it public or private, shares all work the same – they split the “profit” a company makes into dividends. These dividends are then split between the asset’s various “investors” in order to validate the investment.
As such, this process is entirely regulated by the SEC as to ensure a fair and – most importantly – transparent process for potential investors.
Unfortunately, the same cannot be said for “ICO’s”…
ICO’s Are Generally A Waste Of Time…
ICO’s are mainly a way for smaller companies to raise money without having the capital & financial acumen to back it up.
The way they work is like this.
Firstly, a prospective company will create a “blockchain” application through which they will offer a decentralized “ledger” of transactions through which their offering will be perpetrated.
This application will not be something you “install” – think of it as like a marketplace for a particular type of asset which the company hopes to make available in a “decentralized” way. For example, one of the more popular ICO’s – POWR – aims to provide decentralized energy generation, whereby the proceeds from their “ICO” will be used to buy various renewable energy farms around the world.
Once a valid business proposition has been created, the company is then able to “offer” the coin in a timed event. This is normally publicized to “crypto” enthusiasts either through publications or advertising. The offer will typically highlight a “white paper” which explains their plan and what they’re going to do with any funds raised.
From this, they’ll also have a method on their website through which you’re able to buy “their” coin in exchange for Bitcoin, Ethereum etc. The premise is that they will want to then trade the Bitcoins etc in to their local currency, so they can go off and buy/build the assets they’ve committed to.
Obviously, this all sounds good on paper but things become different when real money gets involved. Most people in the investment community have lambasted the “ICO” market because it’s almost entirely based on hearsay and hot air. In reality, most of the the coins being offered are almost certainly destined to fail and the entire operation is unregulated and thus highly risky.
The key thing you need to appreciate is where the assets are going to come from. If an ICO has “assets” at its core, it means that the buyers are definitely in a position to benefit from the transaction (considering of course if the whole thing is successful, of which there is a high chance it may not be)…
Due To The Lack Of Assets, You Need To Be Careful…
Th main indicator of a “scam” is whether there are little to no assets being made available.
Just like in the “investment” world at large, if you don’t have the relevant assets to back up your claims, you’ll very quickly end up either bankrupted or with serious cash flow problems. The whole world of “cryptos” is exactly the same.
We personally stay well clear of the “crypto” space (we’ve since sold the majority of our holdings) and are awaiting the bubble to burst. ICO’s are a great example of this.
The big problem, however, is the whole notion of not wanting to “miss out”.
This is pretty much the core driver of MOST of the recent spike in “crypto” prices The prices themselves mean relatively little… there’s no El Dorado and no one is going to come with a magic “money” want to make each “Bitcoin” profitable.
The whole thing is almost entirely built on the speculative hopes of many middle-class people looking for an easy way out of the rat race. And now that truck drivers are unloading their savings accounts to buy a “Bitcoin”, the death throes are surely not far away.
The point here is not to be pessimistic, but pragmatic. Gold rushes happen all the time, moreso now that “black box” technology (SEO, PPC, Social Media) seems to come along every decade or so. “Bitcoin”, “Ethereum” and all the other crypto currencies are just another chapter in a very long book.
ICO’s are representative of that ideal. They mostly don’t do anything apart from facilitate the transaction of “Bitcoin” to some company that no one has ever heard of, and likely has only been operating for 2 weeks out of some garage.
Remember… assets are the name of the game.
If you find an opportunity, you need to ensure it’s backed up by legitimate assets.