A wave of media publicity and debate has been generated in recent weeks concerning the safety of investing in cryptocurrencies with one of the most popular strategies that investors are turning to being Initial Coin Offerings (ICO).
ICO sales are a means of raising capital by offering shares in a newly launched cryptocurrency in exchange for cash or other digital currencies such as Bitcoin, LEOcoin or Ethereum. After a sale the consumer shares in the subsequent risks or rewards associated with their level of commitment.
Unlike traditional business investing – usually the preserve of capital rich backers (think dragons, corporates or wealthy patrons) an ICO is very much accessible to small and large scale investors alike, which means more people are able to participate in the launch of a new currency.
However, just a few weeks ago the UK’s Financial Conduct Authority – a government financial regulatory body – issued a warning to potential shareholders regarding the safety of investing in ICOs, and across the Atlantic, Jay Clayton, Chairman of the US Securities and Exchange Commission, warned buyers to beware when investing.
In their statement the FCA warned of the international nature of the ICO’s space – with many new market entrants based abroad – the sector has to date remained a unregulated space that offers no investor protection, price volatility, the potential for fraud, and in some cases inadequate protection.
All these are valid concerns and there have been instances of deception in this fast moving sector, however legitimate entrepreneurs have so far raised more than $1 billion, some venture capitalists have seen their assets soar with the continued rise of currencies such as Bitcoin, whilst others have disappointingly fallen victim to predatory schemes promoted by shadowy crooks.
Investing in an ICO can be a great way of turning a profit, however, as with any business venture I would recommend you do your homework thoroughly before committing any of your funds.
ICO scams come in many shapes and sizes so there’s no shortage of pitfalls to watch out for. As I already mentioned look out for where they’re registered, is it a remote, far flung tax haven, if so what are they hiding exactly? Has the cryptocurrency you have cast your eye on copied, or is trying to impersonate another coin? Again, why? Is the coin linked to a possible ponzi scheme (read my blog on what to watch out for there)? These organisations are likely to overvalue their coins to earn high returns from commission, use examples of other legitimate coins to claim massive return on investment or rely on marketing over technical innovation.
Not a publicly traded coin? Then the digital currency you’re looking to invest in may only be using internal exchanges that aren’t open to everyone and therefore not transparent – if this is the case then you should be questioning your purchase. And again if the ICO window is short, for instance lasts no longer than 30-60 days, then it’s best to steer clear to avoid trouble.
ICOs do represent risk, reward, and the potential for healthy returns, but just because ICOs are a new, fast moving opportunity, doesn’t mean you should overlook the usual checks and balances to securing your investment – although the crowdfunding model does encourage “retail investors” the principles of parting with your money are the same as if you were making a significant investment such as buying a house, car, or that centrepiece suit for your wardrobe.