ICOs operate in an almost similar manner as IPOs, except that they give modern companies a more upper hand when raising funds. They do so through selling tokens as opposed to stocks or shares. An individual can purchase the tokens using different kinds of funds like Fiat currencies, Ether, or Bitcoin. Whereas Bitcoin is a cryptocurrency, Ether is a token.
The decision to participate in ICOs is influenced by the combination of both the pros and cons of ICOs. That is why you need to keenly evaluate the merits and demerits before making the decision to get involved.
In this article, I will cover both facets so that you can take informed action. Let’s get started.
Merits of participating in ICOs
There is a wide range of benefits that can be accrued from Initial Coin Offerings. They include:
- High liquidity value
- Investors and startups can easily access it
- Higher returns on investment
- Reduces paperwork requirement
- Investors become part of a community
Pro #1: High liquidity value
Liquidity refers to a product or a market being available to a large sustainable audience. Even though this is not the most exact definition, it helps us better understand why I am saying ICOs have high liquidity. Similar to any successful product out there, its availability in a number of scenarios goes a long way in determining its success rate.
When you invest in ICOs, you are given tokens that can be traded in a secondary market in which case the underlying asset is the coin you have invested in. This comes in handy in ensuring that the return on investment is accelerated. Furthermore, investors are given a chance to gauge the company’s performance just using real-time pricing and the secondary market.
In this market, there is a tendency for liquidity begetting liquidity. That is, as the cryptocurrency launches, it attracts more players and its liquidity increases.
Even though some experts raise a concern about the huge number of cryptocurrencies, it is worth mentioning that ICO has somehow found a way to maintain high liquidity value.
Pro #2: Investors and startups can easily access it
As things currently stand, ICOs do not face stiff regulations. There are minimal chances of being locked out by regulators who might want you to become a sophisticated investor. This is a great shift from IPOs. With this kind of high-level easy accessibility, literally anyone can participate in the ICOs.
The steps involved in doing an initial coin offering are simple. Whether you are a large corporation or a small business operating from a global perspective, ICOs can easily be accessed.
The whole process is highly democratized, from fundraising to investing. It is important to understand that the idea of bringing democracy to currencies was one of the motivational factors for the emergence of cryptocurrencies. As such, since ICOs are based on decentralized cryptos, you can be sure of this kind of democratization.
There are minimal barriers to entry in the whole ICO process. From minimal regulation to simple entry steps, startups are given almost instant access to the market. There is no need to have a prior solidi relationship with an investment bank, something that is known to kick out most people from IPOs.
Pro #3: Higher returns on investment
Every business transaction is all about the returns, except if you are in for charity purposes. Calculating the return on investment involves subtracting the cost of investment from the gain of investment and dividing the results with the cost of investment.
It goes without saying that if the cost of investment is lower than the gain from the investment, you can expect a much higher ROI. This is something that is synonymous with most ICOs.
If you want to know the ROI ratio of any project, all that you should do is make a comparison of the ICO token price to its current value. First, determine how much money in USD has been raised throughout the campaign and divide it by the total tokens sold. When you do so, you will be perplexed by the high ROI rate.
Pro #4: Reduces paperwork requirement
In IPOs, there is a lot of regulation. This leads to numerous regulatory filings without which you cannot take part in the IPO. Just to give an overview of the tedious paperwork involved, you will need an engagement letter, a letter of intent, registration statement, underwriting agreement, and red herring document.
One wonders why all of these are still asked in the modern world. You could even give up long before you have a shot of taking part in the IPO.
ICOs are an exact modernization of IPOs. A major part of being described as a modern business is the ability to operate without so much paperwork requirements, exactly what ICOs offer. All the paperwork you can expect here is the whitepaper.
This is drafted after a company and developers have proposed an idea to the the community who like it and then ask for some kind of formal explanation into what the project is all about. The whitepaper helps provide clear details of the project.
The whitepaper addresses literally everything that the community might be concerned about. It tackles risks as well as the benefits investors can expect.
Afterward, the process of getting involved in the ICO is initiated, including determining the number of tokens to be distributed, each token’s price, and how it will be impactful to the project’s ecosystem.
Pro #5: Investors become part of a community
The world of cryptocurrency can easily become isolating, especially if there is nothing to bring you together. That is why ICOs are very important to investors as they are enrolled in a common community. The ICO community basically involves a group of people who get to know each other in the cyberspace. They regularly exchange information about cryptos and any future ICO.
When launching the Initial Coin Offering, the idea of active community engagement is often insisted on. There are different platforms that are often based on while creating a trusted community. These include Medium, social media channels, message boards, among others.
Demerits of participating in ICOs
Con #1: Potential frauds
One of the biggest issues that face ICOs is the idea of fraudulent activities. One can easily go bankrupt when they become a victim of a fraud. There are a few examples of such occurrences, more so involving hacking instances.
It is mandatory that measures be taken to curb hacks and frauds as technology continues to attract more investors. The programmers selected to work on a project must have a detailed understanding of modern attack mechanisms and put in place mitigating actions.
Con #2: Possibility of a volatility
ICOs can easily turn drastic on matters to do with volatility. This is something that is quite common in the world of cryptocurrencies. Think of Bitcoin that fell from $20,000 to $6,500 in 2018. Therefore, one must have a detailed understanding of the different factors that affect the ICO product to avoid making significant losses.
The merits of ICOs outweigh the disadvantages. This gives you the confidence that it is an area you can comfortably participate and expect to make great returns on investment.
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