Many of the early investors in bitcoin have reaped so much as their ROI, some numbering in the tens or hundreds of million USDs. This reality has made cryptocurrency the ideal short term investment purview and most investors have found the idea of diversifying the funds gotten from the venture into other startup projects in the hope that in a few months or years they could reap 5x, 10x or more. With this mentality, it goes beyond saying that, this and other factors combined have either directly or indirectly induced the rapid proliferating rate of ICO conventions.
As at the time of this writing, cryptocurrency market cap is by far the north of $500 billion USD while the total contributed to date for ICO campaigns that have concluded their ICOs is well over the north of $3 billion USD with total tokens market cap set at $15.5 billion USD. Lucrative? – yes, no doubt those charts and figures are convincing enough to either start your own project or invest in the most prospective or steady cryptocurrency. However, this rise in the amounts of tradeable assets and transactional course increases the risk values for a system that is unregulated and although decentralized, it still presents a lot of uncertainties and security risks that are also a top concern in the market ecosystem.
While considering to invest or participate in an ICO, or as a developer hoping to conduct a crowdfunding event for a prospective venture, certain insights can provide educational background for decentralized ledger technology to curtail ramifications that may occur – these are considered risk indices.
The current trend in global internet investment is the initial coin offering, where tokens – usually referred to as digitized real-world assets are often offered up as a value in exchange for fiat or other cryptocurrencies. Since the first tokenized asset sale in 2013, the trend has picked up pace tremendously due to successes within the phenomenon. However, not all crowdsales have succeeded in their ventures, that is, not all Initial Coin Offerings have been able to fulfill their obligations and therefore have either defrauded investors of their investment worth or lost the funds due to poor secure technical infrastructures. While some have walked away with investors funds, others have struggled with market competitions in order to stay relevant and sustain what’s left of value in their tokens.
Initial Coin offering at this point is unregulated, this statement so far may have become an internet cliché and one may oftentimes be tempted to overlook or undermine the consequences. The truth is, no government has at this moment given a full support to the conduction of Initial Coin Offering within its jurisdiction without proper documentation. The gravity of this outcome is, many people could lose their funds if the alleged huge bubble decides to crumble on all the investors. Some will definitely leave richer and others poorer, indeed it might be considered then as the huge pyramids of all times.
While many economic and financial experts may recognize the plausible importance of the blockchain technology and the surrounding derivatives – such as smart contract protocols, open source verifiable blockchain products, and initial coin offerings, and their economic impact on a global scale, they are wary of the consequences if delimitations aren’t set for this economic technology.
Initial coin offering is the analog of initial public offerings. The major differences between these analogs are in the nature and definition of the stakes (legal bits of the company, or shares) and the manner in which this public sale of stakes is conducted. Frankly and agreeable, some of the tokenized assets can be considered as securities because of the nature especially in the project’s description of their identity and terms of usage.
Why they may simply be termed as currencies in the end, they superfluous existence sometimes take on the guise of securities and eventually affect the investors or they – the developers due to ignorance. IPOs have guidelines that pursue a centralized objective and have set rules and regulations that govern their sales. ICOs simply have decentralized characteristics and give more control to owners of the venture or in the case where smart contracts are robust, to none at all.
‘Altcoin’ is a term that describes any other cryptocurrency apart from the primordial decentralized cryptocurrency – bitcoin; being the first cryptocurrency, other cryptos may have adjusted their existence from the original algorithm consensus of bitcoin. While real-world adoption and application of the blockchain technology still expand, research is still limited and the knowledge base rudimentary.
Every ICO aspires to make the coin market cap table, but aspiration is not all it takes to be a successful cryptocurrency; looking through the history of bitcoin’s price index chart, there were several irregularities and volatility structures before it got to this height; still, bitcoin still experiences several setbacks through FUD, regulatory uncertainties, limited operational model (p2p currency), forks, mining operational dependence, high fee and slow transactions among other.
Now this setback has always been there even when it was the only cryptocurrency. And now with multiple altcoins in the cryptosphere, the numbers of risks have multiplied by the factor of their numbers; in other words, if one cryprocurrency had all that challenge, all others will experience the same or similar ordeal. So to invest or develop a project without that understanding is to risk the uncertain.
The major reason why tokenization of digital assets is becoming a thing is because of undue hype cryptocurrencies and their derivatives have encouraged. They have become the driving force for the non-technical investor types. The fact that they could make more money without having to do much other than buy a token and leave it for a set period of time. The thought most times is that comparatively if the same amounts were stored in the bank, the interests are not encouraging.
So the trend would be to think there’s nothing to lose by investing in initial coin offerings that offer huge returns and incentive bonuses. However, the dawn is always different on the horizon; soon not everyone’s expectations are met and they discover that the project was only driving by hype and there was no real-world value to begin with.
It takes quite more than written and well-polished documentations – whitepaper, articles and press releases to make a successful enterprise. Sophistication doesn’t help either. Most times, the simplest DLT concepts have attracted reasonable supports and funds and have maintained their luster over the course of their existence.
On the other hand, most proposed ventures didn’t make their target capitalizations and have had to either restart the project or in worst cases walked away from the project with investors funds. Others who made it into the crypto market system, after a while, once the support is not as strong as that from the beginning can force the project to close shop, rendering the token useless.
To the larger percentage of the investors’ circle, the major aim is not just to promote the project or its underlining scope but to make the profit. Liquidity has been described as the level to which an assist can be quickly traded without affecting the price of the asset. It can be observed from this insight that most cryptocurrencies have failed the liquidity test. If for example, an individual who has a large stake in bitcoins, suddenly decides to liquidate his assets, suddenly the availability of excess bitcoin in the market would affect the trade volume beyond what the market system can buffer to recover from.
Similarly, once an individual buys a large amount of a particular token, once the token hits the exchange, if the individual decides to liquidate all his assets, it can almost render the token worthless as compared to its entry price. However, other investors may also use this opportunity to influence the market price of the token and render the project useless. Because projects which stay too long at the bottom begin to lose prominence.
With the constant pressure from the SEC and relative regulatory bodies in other jurisdictions, it’s quite hard to speculate the direction the cryptocurrency ecosystem will end up. While the market shows so many opportunities and promise, regulation might turn out to be an undesirable turn of events.
However, it may be too soon to conclude, but knowing fully well that decentralization in the first place was meant to create an ecosystem that was autonomous in nature. Bringing about a system regulation other than the function of a smart contract will definitely have effects on the overall system.
Market volatility; pump and dump cycle
One other major influence on initial coin offering is the native cycle of ‘pump and dump’ in cryptosphere. Many large investors have often time used this system to initiate FUD (fear, uncertainty, and doubt) to members of the ecosystem.
This has invariably affected the risk level of many projects, as one can be forced to sell off assets earlier and at a loss than was initially planned. It is indeed a normal thing, however, it is hard to predict when next it would occur and how relative the adverse effect will be on other cryptos or tokenized assets and to what degree.
One outrageous claim by numerous ‘wannabe’ developers are doing an outstanding or novel project without having a prototype or an already established proof-of-concept to back their claims. Suddenly it would seem as if they bit more than they could chew. Up to date, there are over 600 failed ICO and crypto coin projects.
The crypto-coin market is currently chocked and the competition is nothing like can be found in any other business venture; the campaign for relevance and the struggle to maintain steady price growth against the odds of intrinsic behaviors of volatility and illiquidity factors. Oftentimes, enterprises with an already established business premise stand at a greater advantage to buffer the discomforts faced in the crypto ecosystem.
Investors’ risk assessment
Exposure to fraud and ICO misdeeds
There is a high tendency that an investor would be exposed to fraudulent practices, illegal operations and could result in penalties unforeseen. Since ICOs will eventually faceoff with jurisdictional limitations and regulatory legacy systems even with AML and KYC policies, it is currently uncertain what fate lies the token sales conventions.
One thing is certain, decentralization has come to stay, however, standardization of the blockchain network and regulatory inclusions may be an attempt to re-centralize the system. This conflict of interest may drain some good looking ICOs of any juice left and their products may be under strict manipulation from financial watchdogs.
-Shorting: this is an investment technique employed by experienced investors to make gains during a shorting period of assets listed on exchanges. However, if the idea of this technique is to be applied to ICOs or cryptocurrencies the risks are extreme as the system is completely volatile and unregulated.