After a warning from Uganda’s central bank about OneCoin, there continue to be stories about other coins claimed to be Ponzi schemes. In spite of this, many cryptocurrencies are traded in the secondary market with ICOs as an investment opportunity. But how do you go about the process?
So I am clear, this does not constitute investment advice. I thought it pertinent to share some general information about Cryptocurrencies and ICOs. As a buyer, beware for those seeking to take part in this exciting but very speculative and risky area.
What are Initial Coin Offerings?
ICOs are the process by which cryptocurrencies are created, launched on the market before they trade in a secondary market. Before listing in the secondary market, a cryptocurrency/coin comes into form through an Initial Coin Offering (ICO).
You can parallel an ICO to an Initial Public Offering (IPO) for trading a stock for the first time. Subsequently, the coin or stock trades in the secondary market. But, before one participates in an ICO, it is important to understand the why, what and wherefores of.
I share below some of the things to look out for before diving into owning a cryptocurrency or participating in an ICO. This is knowledge gained from reading up on the subject, and discussions with others more knowledgeable on the subject.
Where to start?
A good resource for viewing all coins trading in the secondary market is CoinMarketCap. This lists almost all the coins trading post-ICO in a secondary market. If it does not exist on Coin Market Cap, it probably is not a legitimate coin. The platform also lists the exchanges where coins are trading.
As of 26/09/2018, there were 2003 coins listed at Coin Market Cap. To buy into or sell a coin, one would have to do so through one of the exchanges listed on the platform.
The top five (5) exchanges by volume traded as listed on CoinMarketCap in order are Binance, OKEx, Bitfinex, Huobi, and Bithumb. Yet, it is also possible to trade coins through willing buyers and sellers off the exchange. That is straight from wallets where the coins are held. Examples of wallets include Blockchain Wallet, Binance Wallet etc.
How do you identify a genuine ICO?
If an ICO is genuine, most of the information below should be available at the ICO project site;
1. Coin and use case: What is the proposed coin and the associated use case? Does this make sense? Is there an economic rationale? What is the history of the founders? What problem are they trying to solve with blockchain? Does it fit with a relatable use case?
2. Blockchain and protocol: Try to find out the blockchain being used and the associated protocol. This will give you an understanding of the blockchain properties. It will also help answer questions like; Will the scale of the blockchain be easy? Will demand be attracted to the blockchain? If yes, how quickly are transactions processed on the blockchain? Is the associated protocol secure and relatively hack proof? How does the protocol and blockchain model compare to peers?
3. White paper: A white paper is a document which includes an outline of a problem that the block chain project is looking to solve. It provides the solution to that problem and a detailed description of their product, architecture and interaction with users. For example, a whitepaper database exists.
4. Community Support: Is there a community associated with the coin or is one proposed? What activities does the community support? For example, it is common for a community to issue out grants to people/startups that are building products around the blockchain associated with a given cryptocurrency.
5. Supply: How will supply be controlled? How much of the coin is freely traded? How will it be mined? If supply is very limited and there is a string use case, it may be expected that the coin will increase in value as demand soars.
After you have considered all the issues outlined above and you still want to proceed with participation in an ICO, here is some guidance.
Good luck investing! See you at the next ICO.