Looking into investing some of your cash in an ICO (initial coin offering)? The crowdfunding events that let you purchase companies’ digital tokens can be lucrative, but they’re also incredibly risky.
One risk involved is the very real possibility that the tokens you purchase simply lose value compared to the ICO price. Some projects die; others get stalled for months and years, and some were just never very good to begin with.
But there are other types of risks. Since ICOs typically involve moving ether — the currency of Ethereum, which is the platform for the vast majority of ICOs — you could easily make a mistake there. Or you could just be phished or otherwise swindled out of your digital funds.
Here’s a list of precautions you can take to make reasonably sure you’ll survive an ICO unscathed.
First, make sure you choose a solid project to invest in. Just because a friend gave you a tip or you saw a token being aggressively advertised on Facebook, doesn’t mean you should immediately jump in.
Carefully examine the project.
Do your due diligence:
Read the information on the project’s website, check out the team and the advisors, and read up on their backgrounds.
If there are outside investors involved, see who they are. A big VC fund might indicate a project with a higher chance of success.
Check out the project’s social channels and blogs: Are they updated frequently? Are they run professionally?
Read the project’s whitepaper; if it’s too technical, find an expert’s evaluation or ask one to evaluate it.
Does the team already have a working product? Perhaps in beta or alpha stage? If possible, try it out. A solid working product, or at least a proof of concept, might mean the team is serious and potentially already ahead of their competitors in the space.
Carefully examine the ICO terms and conditions: Has there been a large pre-sale discount? Is the total market cap and the amount of funds being collected realistic and reasonable? For example, a company making a decentralized calendar app probably does not mean half a billion dollars in funding.
What’s the project roadmap like? Does it appear realistic, or is it just a wish list?
What’s the team’s plan for spending those ICO funds moving forward?
See what social channels are saying. Check Slack, Reddit, Telegram, and more, but be wary that there will be lots of unreasonable shilling for the project, as well as just plain clueless comments. Use common sense; if something feels off, stay away from it.
Understand the risks before going in.
Typically, when a project tied to an ICO fails, the associated tokens will plummet in value. This is a possibility you need to consider. If you buy, say, a thousand dollars worth of tokens, be prepared to lose a big chunk of it, or even your entire investment. This does happen; not all ICO-issued tokens will jump tenfold in value, and even the rare ones that do won’t necessarily stay there.
The old adage works: Never invest more than you’re prepared to lose. And when investing in ICOs, understand that this is the riskiest possible type of investing. Do not squander your pension for the possibility of a quick buck.
Before you invest, check what the terms and conditions say for your nationality and place of residence. In China, ICOs are banned altogether. Residents of some countries (often the U.S.) may be banned from participating in an ICO. It’s sometimes possible to circumvent this, but this may be illegal and severely punishable by law.
No path is 100% safe, but there are precautions you can take.
After you’ve carefully considered all of the above and decided you want to participate in an ICO, make sure you know how cryptocurrencies work. Get acquainted with the concept of a wallet. Buy a little bit of ether on an exchange, create a wallet (Parity or MyEtherWallet are your best choices right now), and send a little bit of ether (0.005 will do) to that wallet to check how things work.
Then, send the amount of ether you want to invest to your wallet. (Never send money to an ICO from an exchange; always send from a wallet such as Parity or MEW.) At the time of the ICO, you will send this ether to the ICO contract address. Protect the wallet with a password, and store it safely. If you lose access to your wallet, you lose all your funds.
Before we go further, understand that all ICOs are different. There are no rules set in stone. Some ICOs aren’t on the Ethereum platform, but the overwhelming majority are. For simplicity’s sake I’ll only refer to these.
In the simplest of terms, the process of the ICO boils down to this: You send some ether to an address, and after the ICO’s done, you get tokens in an amount proportionate to the amount of ether you’ve sent.
But as the popularity of ICOs rose, so did the scams. Now, a typical ICO (again, every ICO is different, read the terms and conditions very carefully), will look as follows.
1. Register for the ICO through the project’s website.
Some ICOs don’t require any registration. This is a red flag; it’s still possible that it’s a legitimate project, but lately most high-profile ICOs have required users to go through at least some kind of registration
Sometimes this will involve sending scans of your passport or a similar document. If you’re not comfortable with this, stay away.
In some cases you will be asked to provide an address to which you want to receive the ICO tokens. Make sure you send a Parity/MEW Ethereum address that you have access to.
2. When the ICO starts, send some ether to the address provided on the ICO website.
The ICO website will typically have a counter and a clearly designated date and time when you can send funds. Do not send your ether before that time, or after the ICO ends.
Many ICOs are capped to a certain amount (like 10 ETH per person). Do not send more than your personal cap.
Be very careful when sending funds. Triple-check the ICO address before sending anything. There will be phishers sending you fake addresses on Slack; there might even be fake ICO websites as ads on top of your Google search results.
Some high-profile ICOs may have thousands of people sending ether at the same time. The Ethereum network might get congested, and transactions might take a while to go through. You can check the status of your transaction by appending the Ethereum address you’re sending from to this: “https://etherscan.io/address/” (here’s an example)
Make sure you set the right gas price and gas limit (gas is the extra ether you have to pay for an Ethereum transaction to go through). These are typically laid out on the project’s website. Often seen values are a 250,000 gas limit and 21 Gwei gas price but this is can and will change from ICO to ICO. Do not go crazy with this and put in huge values; gas is just another name for ether and the bigger these numbers are, the more ether you pay for a transaction.
3. Per the ICO terms, you get tokens to your address.
This might take a while; sometimes, the tokens will be sent immediately, sometimes it can take weeks, months or even longer.
When you receive the tokens, they may not be immediately tradable. This depends on the smart contract within the token. These details were probably laid out on the project’s website.
Sometimes, things will go wrong — or appear to have gone wrong. Don’t freak out if you haven’t immediately received your tokens. During a busy ICO, these things can get delayed; deadlines can move a bit. Consult with other investors in social channels. If it really feels like there’s something wrong with your investment, contact the ICO team directly; they should be able to assist you. On the other hand, there have been examples of ICO websites getting hacked or even entire ICOs being scams. Hopefully you’ve done your research and avoided scammy or unprofessionally run ICOs in the first place.
I’ve bought my first tokens, what now?
The ICO is over, everything went well, and you have the tokens in your wallet, so what do you do next? You can just leave them be (especially if you believe in the project’s long-term success). Some tokens come with perks; they can be used inside of a project’s ecosystem, for example, or even carry dividends. You might be more inclined to keep those tokens.
You can also sell your tokens at an exchange. But it might take a while for a newly minted token to appear on an exchange. You probably won’t see just any token on the largest exchanges such as Coinbase or Bitstamp, but there are numerous exchanges which do list many tokens, including Bitfinex, Bittrex, Binance etc. You’ll need to set up an account on each of these to sell your tokens through them.
There’s no set rule on when an exchange might list a new token. Some tokens never get listed. Some highly anticipated ones might get listed on most of the above fairly quickly. Follow the announcements from the project and the exchanges themselves to learn when your token will get listed.
You might be able to sell tokens much earlier on a decentralized exchange such as EtherDelta or RadayRelay, but learning how to work with these can be a chore and if you’re not careful, you might press the wrong button and lose your tokens.
While the technicalities of selling your tokens differ from exchange to exchange, the basics are the same, and buying and selling ICO tokens is similar to buying and selling ether itself.
As for investment strategies, those are a complex topic and are mostly outside of the scope of this article. In broad terms, you can treat tokens like stocks; strategies like “buy on rumor, sell on news,” or technical analysis (most exchanges will provide the tools for that) will apply. But not everyone is cut out to be a trader; for most people, the biggest benefit of participating in an ICO is getting in early. If you’ve done your research and chose a solid project with true growth potential, you should probably just relax, sit back and watch the value of your digital asset grow.