More than $900,000,000 worth of Tokens were bought in September 2017.
People are sending such money in return getting a Token (digital currency) which represents some kind of special access or profit share within a project/company they decided to back.
Sounds crazy, right? It kind of is! A hype of investing money into some kind of ICO is reaching its peak, however, I could argue that the vast majority of such investors doesn’t have the basic knowledge about the TOKENS.
Due to my experience in various ICO projects as a technical person I’ve gathered a great deal of knowledge around token models, their mechanics and came to distinct the most feasible token models. Therefore, I want to share my knowledge on this specific topic.
Here is the list of 5 things every ICO investor must to know.
1 . Token is a piece of code
Tokens issued on Ethereum platform are just a piece of code — a Smart Contract. The code stores a list of people wallet addresses and their balance of that token. Once someone is transferring the token the sender’s balance is reduced and receivers increased. That’s it. This transaction will be recorded in the Smart Contract storage. Anybody can create a new Token, issue it, share it or sell it.
2. Token types
From a business point of view, most of the tokens is a promise in the future of two types: profit or some kind of utility within the system.
Security Token. This type of token is a promise for future profit. Once the platform is ready and profitable, the team will start distributing profits to its token holders.
NOTE: with such approach, two huge risks arise: most of Token exchanges do not accept such type of tokens, therefore, you might have problems with liquidity.
Another risk important to mention is that these tokens do not guarantee you anything by the code itself. The team might not be paying profits once the platform becomes profitable. All you are holding here is a trust for the team that they will share part of the profit with you. Most of the times you do not have any legal rights for the profit.
Utility token. This type of token is a promise of a future use within the platform. Cryptopreneurs are now creating various ways to integrate their Token into their platform so that the demand of a token would increase with a success of the project. This would lead to a huge price increase of a token resulting in a profit for early token holders. The thing every investor should look for is a strong reason why token demand should increase over time. If you find that, then it might be a good shot.
My advice — you have to understand the type of the token and if it makes sense and is actually legally validated, technically feasible and profitable for you as an early contributor in any way in the future.
3. Token total supply cap should be defined
Recently I have found ICO’s which do not declare and write their total supply cap within their Token Smart Contract or even do not issue any token at all. This puts potential investors into a risky situation that team can actually issue more tokens after some time and therefore dilute your token value. Always make sure that team has clearly stated their total token supply cap and they do not have any minting possibility after ICO.
For instance, Bancor project raised $150M during their ICO and only after ICO few smart people found that the project team has left an opportunity to generate new tokens, destroy existing ones for any investor or even disable all token transfers.
4. Token listing in exchange
The main motive why most of the people invest in ICO is definitely not a long-term profit. Their ICO participation is based purely on speculation with the goal to sell the token at least 3 X once the token hits the exchange.
That’s why all the investors should care about the team plans to list token to the exchange and get the needed liquidity. A Token should implement a standard interface such as ERC20 for Ethereum so that exchanges would be able to easily list the token from a technical standpoint. These days it is really hard to get your token listed due to the heat within the market, therefore, exchanges list only most hyped coins.
5. Token value
Everybody should understand, that most of the times Token is a future promise without any legal rights or any hardcoded rules within the Smart Contract for profit or utility. This means, that you have to seek for a legit team, unique project and hyped community around the project. With that in mind, you should do your own due diligence and invest money you are willing to take a big risk with.
Final tip for investors
Read carefully what you are you actually buying and answer yourself, why is this token going to be worth 3 X in the future? Try to avoid speculation as an argument.
Additional tip for ICO project starters
Make sure you have a clear answer about your Token and why people should invest in it in a long-term and hold till you succeed. Discuss ideas with technical people and validate it with lawyers and regulators so that you and your investors would be sure why Token will cost more in the future.