Wondering how to invest in ICOs, or how to understand more about token sales? This article provides 5 key tips to keep in mind when starting to invest and make the best of the opportunity!
As we write this, immense interest pours into initial coin offerings, or ICOs. For the uninitiated, ICOs are crowd-sale of crypto assets, including cryptocurrencies and tokens and coins. Early adopters made millions in the amazing bull run of Bitcoin & Ethereum till date. Now those people are the key force behind the huge interest in ICOs today. However, a majority of people still wonder what ICOs are and how to invest in ICOs.
Consider this – multiple ICOs raised nearly $1 billion in the first six months of 2017! This is huge by any measure, considering tokens are a fairly new concept. It is fair to say that many more people are entering the crypto fray now.
However, due to high volatility in prices, investing in crypto assets remains highly risky, even for Bitcoin and Ethereum. For the people who are still keen, here are 5 tips to keep in mind while trying your hand at investing in this asset class:
1. How to invest in ICOs: Understand the various risks
Technological risks: Tokens are a very new technology. They aren’t like regular money we’re used to. Be sure to understand the basic technology, and most importantly, how to save and use your tokens. Tokens are saved on digital wallets. For your wallet or the wallet provider, hacking is a real threat. Also, wallets have complex (un-memorizable) public & private keys. Losing your keys is akin to burning your money. It’s not like a bank where you can ask for a password reset!
Economic & financial risks: Crypto economics is in its nascent stage and most projects are in their infancy. So factors behind success and failure of projects are not understood well. Time will tell and more knowledge will be available later, but today they’re largely an unknown.
Crypto assets are financially risky due to their high volatility. In the foreseeable future, the volatility will remain a feature of this asset class. Therefore, don’t be the guy who wanted to take a personal loan to invest in cryptocurrencies. There’s only an outside chance that strategy may turn out to be lucky. It may be lucky, but will definitely be stupid!
Legal risks: The legal risks exist due to ICO’s uncertain status globally, especially the US. The SEC has mostly been silent on ICOs till now. It’s not clear if the SEC will come down heavily on ICOs later, or take a benevolent view. While the possibility of regulations impacting token holders severely is low, it’s still a wait and watch.
2. How to invest in ICOs: Understand that most projects will fail
Investing in ICOs is as risky, if not more, as investing in early stage startups. Of course, some tokens will be immensely successful in the long run, but a majority of them will fail. This is in line with the high failure rates of startups, and most token projects today are early-stage startups.
Just like in most startups, externalities will drive failure in most token projects, and not lack of smarts, integrity or hard work. Market response, long-term acceptance or competitor strategies may turn out to be vastly different or costlier than anticipated, leading to failure.
3. How to invest in ICOs: Understand the business, token & value appreciation
Every company doing an ICO details their concept in a white-paper. Be sure to read the white-paper in depth and understand the proposed business. Research more about the team and join their slack community to follow the discussion about the ICO and questions others have.
One feature of successful token projects is that the token is integral to functioning of the project proposed. Try and understand the underlying economics of the business and expected appreciation in token value. It’s possible that the project becomes highly successful in the future, yet the token doesn’t appreciate in value commensurately. This can happen due to uneven incentives to token holders. Avoid ICOs where it’s unclear how tokens will see a price rise, even if the business makes sense.
4. How to invest in ICOs: Invest only what you can lose
As is true of any high-risk, high-return investment, invest the money that you would be okay not seeing again. The worst mistake an investor can make is having plans based on the presumed returns of her crypto investments.
As a rule of thumb, invest only about 1-2% of your net investment portfolio in crypto assets today. Also, to be safe, invest in multiple assets to diversify your risk. And most of all, take it well on your chin if you lose all of it.
5. How to invest in ICOs: Don’t be swayed by the volatility
Evaluate the token for economics, understand the risks and invest only as much as you can afford to lose completely. After doing this, switch off for a bit. Don’t keep watching the price like a day trader. Once you’ve made an objective investment decision, ensure that emotions do not make you take a hasty step.
Just a few weeks ago, prices of crypto assets dropped a lot. Bitcoin, Ethereum and other tokens lost nearly 10-20% of their value. And then soon after, all of them went back up. So, once you invest, sit back and relax and enjoy the roller coaster ride, for it sure is going to be one!