Most startups look to angel investors and venture capitalists to provide funding for the takeoff of their businesses. It is not an easy process. You need to create a solid business plan to show viability of the project, pitch the plan to the VCs/angel investors, then run the business all the way to the proposed exit plan (divestment, IPO, etc).
The development of cryptocurrencies in the last 8 years has altered this landscape radically. It is now possible to use cryptocurrency units (known as tokens) to raise funds using a crowdfunding technique. Further enhancements provide incentives for the community of funders to invest in the project, which increases the demand for the blockchain-based products and hence the value of the tokens. This is the basis of operation of Initial Coin Offerings (ICOs).
Suggested Read: 3 things you need to know about ICOs in the Nigerian context
Blockchain projects have raised a total of $8 billion with initial coin offerings (ICOs) so far according to data from the CoinDesk ICO Tracker.
How do ICOs work?
Just the way shares connote company ownership and constitute the unit of equity held by a shareholder, ICOs present the “token” as the unit of ownership of the blockchain-based product they are promoting. Just like in traditional IPOs, the funds raised from the sale of the tokens are used to finance the development of the product being promoted by the company operating the ICO.
Prior to launch, the company intending to raise funds from the ICO will prepare a “white paper” (more like a prospectus in an IPO) to provide more insight into the product being developed, how it will be promoted and grown, and any benefits that will accrue to initial investors as the product is developed. Most ICOs are based on the Ethereum blockchain technology; this allows investors to use Ether to exchange for the ICO tokens.
What is the profit potential in an ICO?
The potential for profit in an ICO follows the same pattern that stocks of newly listed companies use on the way to becoming more valuable than investors initially paid for them in an IPO. Most investors use the buy and hold approach when purchasing ICOs.
Therefore, an ICO’s profit potential lies in the ability of the company or fund’s ICO product to command great public interest, to the extent that there is a large demand for the product, which subsequently impacts revenues enough to boost the share price (in this case, the price of the token). There are various examples of ICOs that were launched between 2016 & 2017 that are already delivering returns on investment for the early bird token investors.
- Stratis — Launched: July 2016, ICO Price: $0.007, Token Return: 53,900% (As at March 2018)
- Antshares/NEO — Launched: September 2016, ICO Price: $0.188, Token Return: 27,500% (As at March 2018)
- Spectrecoin — Launched: January 2017, ICO Price: $0.001, Token return: 39,000% (As at March 2018)
- OmiseGo — Launched: July 2017, ICO Price: $0.35, Token Return: 2,757% (As at March 2018)
- ICON — Launched: September 2017, ICO Price: $0.11, Token Return: 3,536% (As at March 2018)
With life changing gains such as these, you can see how possible, and frankly “relatively easy” it is to turn a small capital into fortunes. This is why we are seeing lots of hedge funds and “everyday investors” all competing for a piece of the action.
Profiting with ICOs
There is no investment which is 100% guaranteed. No one can predict the success of an ICO with absolute certainty, neither can any investor gaze into a crystal ball to predict returns on any ICO.
There are many more scams than genuine ICOs out there, so you have to be very careful in selecting which one to invest in. In an unregulated market, there is always the danger of being sold on a scam. So how can you actually make money with ICOs?
Every ICO project has a white paper (authoritative report giving information or proposals on an issue) read it and be able to answer the following questions:
- What does the company do?
- Do they have an existing product? (Ideas are “cheap” we want to see that they can execute)
- Is the management team experienced in the space?
- Is there a need, and demand for the decentralised service? (It’s all about demand. No demand, worthless)
- Can the company generate more tokens after the ICO whenever it wants? Inflation can dilute the value of your token very fast.
- What the token will be used for?
- Do they have a large social community? These days major exchanges want to see that projects have large communities as part of the criteria to get listed.
- How are their promotions? If they keep talking about general informations like how large the industry is instead of describing in detail what the project does, i’d most likely avoid them!
The lack of regulation of the ICO industry makes it very difficult to weed out the bad guys. However being able to answer these questions would ensure to a large extent that you are investing your hard earned money in a genuine product/platform.
About the Author
Osamede Arhunmwunde is an international bestselling Author, Publisher, TEDx Speaker, and Blockchain “Cryptocurrency” Investor. He is invested in over 100 blockchain technology companies. He has also worked with, and advised many prestigious organisations around the world.
Nigerian startups raised $17.6m in Q1 2019, 8.5% higher than they did in Q1 2018. Find out more in the latest quarterly edition of the Nigerian Startup Funding Report here.