Imagine you just got your company registered, and now, to go into production, you need money. Usually, it’s either a bank or a non-banking financial institution (NBFC) that would provide you with a loan. But if the monetary requirement of your company is too big, companies go for a better alternative than banks and NBFCs. And that alternative is called Initial Public Offering (IPO). You launch a sale of stocks of your company to a pool of public investors, who purchase them, in return for the respective percentage of ownership represented by the stocks they hold. And that’s how your problem is sorted.
But then, another issue branching out of an IPO is that you have to share the ownership of a company with public investors. There hasn’t been a better way of raising money than IPOs, until the idea of Initial Coin Offering (ICO) was coined, strictly among blockchain-based companies.
An ICO is when a blockchain-based project offers investors to buy their native tokens, in exchange of a promise that as the company grows, the value of coins will also grow. You see? No distribution of ownership stakes. Companies that conduct ICOs, usually accept popular cryptocurrencies like Bitcoin, Ethereum, and few more, as a mode of payment. In a few cases, they may accept fiat currency as well.
According to CNBC, $6.6 billion were raised through 217 ICOs in the year 2018. Something remarkable that the ICO culture has achieved across the world is a growth of 65% in terms of the amount raised in 2017. One of the primary reasons behind the outrageous success rate of ICOs is that currently there are no hard & fast regulations for ICOs at present, and most of the governments are in the process of figuring out how this newly emerged market can be tamed. Few of the Asian countries like Korea and China have declared an outright ban on ICOs under the skepticism that ICOs may lead to large-scale frauds.
Although closing down all doors to something garden-fresh may not be a very innovative thing to do, there really have been multiple instances where ICOs have actually led to frauds. To make sure they don’t fall prey to Ponzi ICOs, one must always evaluate an ICO event based on the following factors:
A White Paper is a document that covers everything about a project, be it from a technical perspective, usability, core functionality, investment, and others. For someone who is going to invest in the ICO, White Paper is important as it displays the long-term plans of an organization, including the ones based on a blockchain. Besides, documentation has always been considered one of the most credible resources to reflect on the authenticity of an organization.
Something quite obvious is that nobody would like to invest in a business that is bound to fail. And as per common logic, businesses run by proven experts in their respective fields should be the ones you inject your money into. Hence, always learn about the people behind the idea, and whether they already belong to what their company is trying to achieve.
Hard Cap is the fixed, upper ceiling for funds to be collected. It is the most a company would collect during its ICO event. Any fund received after reaching the hard cap is returned back to the remitter.
Soft Cap is the minimum a company aims to collect during the ICO. In a few cases, if Soft cap is not reached within the ICO schedule, money is returned to the investor.
In terms of supply, there are three figures to look out for: Total Supply, Max Supply, Tokens available for Sale. Generally, a lesser number of tokens being offered in an ICO is considered good for its growth in future, under the impression that lesser number of token units will keep the demand for the tokens alive. Apart from that, Total Supply is the total number of tokens that are there at present, reserved for release in the future. A company may hold tokens for a number of reasons, like maintaining the demand, to incentivize its stakeholders and more. Maximum Supply may or may not be mentioned by companies during ICOs as it is a relatively new term. Max Supply tells you about the total number of coins the company will ever produce.
Token Emission Schedule
As much as it is to know about the supply of tokens, awareness on when and how many tokens have been scheduled to be released in the future, is equally important. Token emission schedules can give you a rough idea of what the demand and supply figures of a particular token would look like in coming years, which would also determine the net value of the crypto asset you purchase today.
How something can be used to serve a purpose is called its core utility. In the past few years, blockchain-based companies have majorly focused on disrupting conventional products, services, and solutions. What you should be aware of, while investing your money in an ICO, is what this company offers and how it helps people in their daily lives or resolving a particular issue. Do not evaluate a business’ core utility based only on how unique it is. If it is unique, well and good. But if it is useful as well, that is where your money should go.
The enthusiasm surrounding the blockchain ecosystem, at present, is too damn high. There are blockchain-based solutions launched almost every day, which look impressive. However, a good investor does not make decisions on the spur of the moment. A good investor would always look at how well the business has planned to scale, capture the market, expand the team, and other important aspects, to sustain in the future as well. So, if a company is out there with an ICO that looks like a good investment, do not ignore its future prospects.
‘Actions speak louder than words’. An organization could be promising you many things like growth, returns, and whatnot. But how would you know if all that is really going to happen? When you see how their product or service works. Hence, a prototype or a minimum viable product (MVP) shall be exhibited by the company before they are out to gather funds.