The Downside of ICOs
There are four main downsides to ICOs: they’re unregulated, they’re hard to research, they clog the blockchains, and they can devalue other cryptocurrencies. At the same time, ICOs bring new development ideas to blockchain technology quickly. These ICOs bring us new functionality and fix existing limitations, hopefully becoming even more beneficial in the long term. So how do you navigate the hundreds of new tokens going to ICO and sort the profit makers from the scams?
1. ICOs are unregulated.
ICOs are unregulated by any governing body, which is a big draw for those in favor of decentralization. But while many reject bloated financial institutions for their over-regulation and excessive fees, unregulated ICOs are a wild west of risks. There’s no guarantee and little recourse if a startup ICO fails its investors.
Even if a company outlines a great idea in their whitepaper, you have no guarantee they will follow through. There are also times where people have bought into an ICO that took years to release coins, if at all. Though some of these slower release times have turned profitable, not everyone has enough liquidity for an indefinite freeze on their money. There are no protections or guarantees, so investing in an ICO always carries some degree of risk.
Bottom line: You’ve heard it before, and it’s said for a reason. Don’t invest money you can’t afford to lose. With greater potential for returns, there’s a real risk of losing everything with no recourse.
2. There’s no consistent way to research companies before their ICO.
Each project relies on different marketing campaigns, and whitepapers vary in their level of detail. To invest in an ICO, you have to trust the people involved and believe the contents of their whitepaper. Fraudulent claims and promises can be hard to sort out. If you have some coding background, you might check their work on github, but most investors won’t have the knowledge or time commitment for this. And while there are great organizations reviewing ICOs, they can’t keep up with the volume of ICOs coming to market because it takes so much time to research thoroughly.
Bottom Line: If you want to invest, plan enough time to research thoroughly. Actively following bitcoin & cryptocurrency news and participating in forums will help develop your knowledge and intuition on ICOs. The Coinstaker Initial Coin Offering page will help you get started.
3. ICOs congest the blockchains.
When a popular ICO goes on sale, it congests the network with traffic while everyone tries to buy in at once. Even unrelated transactions slow down and become more expensive until the ICO sale ends.
Additionally, while ICOs are supposed to be democratic, the reality isn’t always so fair. Not everyone gets to invest, as crowd sales can end in 90 seconds. Often, when there’s a lot of hype around a new coin, “whales” (large investors) eat up everything before others have a chance to buy. To even compete, you’re looking at high transaction fees with no guarantee you’ll beat the giants investing in the same ICO. When there’s not enough excitement about an ICO, there’s opportunity for everyone, but the lack of enthusiasm could be a sign the project is a scam.
Bottom Line: Token sales mean higher fees, so try to make normal transactions outside those timeframes. The Blockonomics WalletWatcher and Bitinfocharts show transaction fees in real time, so you can avoid high congestion times. Be prepared for higher fees and longer lines when you’re investing in an ICO. You can also keep track of upcomings ICOs using our calendar here.
4. ICOs can devalue other cryptocurrencies.
ICOs also put a lot of cryptocurrency in the hands of developers in need of fast cash. To get projects started, they convert large sums into fiat in order to use it right away. It’s sort of a necessary evil for new companies going to ICO to get started, but as Ethereum and Bitcoin get converted into fiat, their prices lower in turn for all the people invested. On the other hand, good ICOs can lock up other cryptocurrencies as a reserve for the token, creating more scarcity and potentially increasing their value.
Bottom Line: Developers have an effect on cryptocurrencies when they convert ICO investments into fiat. Be aware of whether each ICO will have a positive or negative effect by researching how they will use the funds they raise.
For now, ICOs are a big way startups fund new projects, and that leaves investors vulnerable to huge potential losses. As more bad actors cross the line, the SEC and other regulatory agencies have begun stepping in. As investors, it’s best to stick to the ICOs you truly believe in and only invest when you can risk the money. As a community, we need to push for an easier way to compare apples to apples when we look at ICOs. Spotting the bad apples before they’re funded will help protect ICOs from over-regulation and protect investors from fraud.
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