Cryptocurrency Investment through Initial Coin Offerings
We are now in the era of initial coin offering (ICO) and blockchain. Blockchain is an innovation that transpired from the creation of Bitcoin. It is the most revolutionary and innovative technology since the Internet.
IPOs + Crowdfunding = ICOs
ICOs took the best characteristics of IPOs and crowdfunding and combined them together. When a crypto startup begins marketing an idea, a business or a project, an ICO is created. Funds come from the public instead of venture capital, angel or private investors. In an ICO, companies raise money directly from investors without a third-party bank or financial intermediary and in return they give out tokens or cryptocurrencies to the investors. The public is willing to invest money to gain tokens from a company or project that hasn’t even launched yet because they see a strong potential in the project or trust in the management team behind the project. In return for believing in the long-term value of the token, early investors get tokens at a discounted rates.
IPOs – Making Private Shares Public
IPOs or initial public offerings are when owners or CEOs make their private shares available to the entire world for the first time. Instead of raising money from private sectors, they raise capital from anybody in exchange for their shares. The problem with IPOs is that only wealthy people (or “accredited investors”) can invest.
There are two phases of IPO, pre- and post-IPO. Pre-IPO is when the real money is made as private investors can take a large amount of company shares at discounted prices before it opens up to the public. While post-IPO is when investors have acquired a company’s stock but are prohibited to sell their shares 90 to 180 days after the company goes public. When you purchase a company’s shares in the post-IPO phase, the price of that stock has already gone 10 times to 100 times higher than its initial price. Clearly, the trick to becoming a billionaire is start a company and then launch an IPO.
Crowdfunding – Raising Money through the Public
Crowdfunding is another method of raising money from the public whereby companies put up a project or a startup company they wish to raise money for and use social media to spread awareness. Even though it’s a good way to raise money, there are many restrictions and regulations surrounding crowd-funding.
For example, the amount of money you can invest is limited. You can only invest $100,000 if you are not an accredited investor, meaning you need to make $200,000 a year or have a net worth of $1 million. Sometimes when it’s just a startup, companies crowdfund in private in order to raise money from a few individuals or groups.
Because of this only people who have a tremendous amount of money are approached. As an angel investor, a minimum investment of $25,000 is required while for venture capitalists a minimum of $3 million is needed.
Now in ICOs, you don’t need $25,000 to be an early investor. Anyone can invest with whatever amount they have and make their million. ICOs allow companies to raise capital without giving up anything. Anyone in the world, regardless of location, can invest without having to visit the company’s head office. As a cryptocurrency investor, you will receive tokens which can be sold at a higher value post ICO. In regular venture capital or angel investments, people with over $1 million net worth invest in exchange for a significant portion of equity in the company because they feel the company can’t raise such a large sum anywhere else.
Venture capitalists and angel investors see ICOs as a disruption because:
- Companies need not give up equity to raise money, they can give away tokens
- There is no regulation in ICOs and no government agency requiring much information and documentation. However, some companies like HybridBlock–the first exchange to allow users to buy and sell across multiple exchanges in one global order book–are taking precautionary steps to avoid potential conflicts with government.
- Liquidity is almost instant. There’s no need to wait for five years or more to cash out or sell the shares you have acquired. As soon as coins get listed on the exchange, you can sell your investment or you can hold on to it.
ICOs Make More Money than Regular Financial Investments
Today blockchain businesses raise more money from ICOs than from venture capitals and regular financial investments. There’s a lot of money in this area and many people have become rich by investing in ICOs. However, despite the promising and endless opportunities it has, investing in ICOs is also extremely risky. The best way to reduce this risk is through proper research. Make sure you understand the value proposition of the startup: what problem is the company attempting to solve? If you think the idea sounds bad or if the company is offering another “me-too” product or service, trust in your instincts and stay away from it.