Initial Coin Offerings (ICOs) are prime investment opportunities for crypto/blockchain investors. However, their rewards come with very huge risks. It must be a matter of the more the risk the more the reward!
Nevertheless, investors should be well aware of the risks involved before putting in their fortunes in the projects. If you have a clear picture of how the ICOs operate and what you expect from the ICOs, then you stand a better chance of making the right decision when it comes to choosing the right ICO to invest in and also in identifying scams.
Let us look into some of the risks that you should put into consideration when considering to invest in ICOs:
- Absence of proper regulation of ICOs
There are no specific regulatory bodies tasked with monitoring Initial Coin Offering projects. Therefore, the ICOs follow no regulatory requirements. As long as the blockchain team feels it has explained its thought to the crowd that is all.
Also, the fact that blockchain and cryptocurrency are decentralized, there are no regulating organs that govern how the tokens or funds are distributed. Everything is left to the users and the development team.
The absence of proper regulation gives way for scammers to take advantage. Anyone can come up with an ICO as long as they are able to convince people to give in their money. Scammers have taken advantage of this and conned lots of people using ICOs. Actually, due to this, China has hinted at banning ICOs.
- Lack of professional vetting before an ICO is released to the crowd
In any financial investment, professional vetting is very important. It gives investors an idea of the financial condition of the company and analyses the business model of the company so as to help the investor in understanding the amount of risk they shall be involved in. By lacking this, ICO investors blindly invest their hard earned money into a company they literally know nothing about expecting the fact that they believe that the blockchain project they are about to launch will be successful.
- The token market is driven by speculation
When investing in an ICO, an investor is purely after the tokens issued by the company with the hope that the value of the tokens shall rise. However, it is worth noting that the value of cryptocurrency tokens is driven by a variety of factors and the major one being speculation among the users.
Since crypto tokens are traded on platforms which are not open to supervision, you could see a daily fluctuation in prices of thousands of dollars. This makes the prices very volatile.
Managing the risks involved in ICO Investment
- Invest in the amount of money you are ready to part with
The promise of high returns makes investors blind to the fact that it is not a guarantee that the project will become successful.
As a retail investor, if you want to invest in an ICO, ensure that you have no other plans for the money that you set aside for the ICO. If you plan for that money and the Blockchain project fails, you shall be left in disappointments and it could even cripple you financially.
- Invest where venture capitals (VCs) have invested
Try to look for ICOs where VCs have invested. VCs are able to do the background checks to ensure that they are investing their funds in a business that has good returns. This way, you shall be guaranteed that the ICO is not a scam and that it also has higher chances of succeeding.
- Invest in ICOs that have a source code ready for implementation
Serious ICOs, have open source codes that investors can look into. If the ICO has no source code, forget about it. It could be a scam.
Also, get programming experts to analyze and find out if the source code is capable of doing what the development team has outlined in their white paper.