Crypto ICOs: An Expert’s Guide to Crypto Investing

As of October 2019, there were close to 3,000 cryptos in circulation. According to a recent article by Rick Bagshaw of Coin Rivet, the total market cap of all these virtual currencies combined was over $220 billion in October. This figure is very close to the $227 billion revenue estimate by Gartner for the entire cloud business segment in 2019.

The market capitalization of cryptocurrencies is enormous, although it is an unregulated space. These digital assets are probably among the fastest-growing markets of the last decade.

The recent actions in the US to regulate cryptos could fuel a faster adoption rate of digital assets. I believe this could lead to a tremendous growth spurt in 2020.

Cautionary advice for crypto investors

Crypto investments are subject to a lot of volatility. Previous trends indicate that returns from some digital assets are exponential. Although this is a promising and lucrative investment avenue, there is a lack of prescribed federal guidelines.

This sector’s unregulated nature makes it prone to scams and frauds. Investors should keep this in mind before engaging with any crypto exchange or investing in cryptocurrency. For more insights on the crypto sphere, please read our beginner’s guide to cryptos.

An intro to cryptocurrencies

Cryptocurrencies are digital assets that could substitute fiat currency for some selected services. It is useful as a medium of exchange over the Internet and can connect participants from around the world in a single network.

A crypto buyer might buy tokens with the intent to hold or accumulate value from them over time. On the other hand, one might choose to trade in these cryptocurrencies hoping to make a profit by trading.

Virtual currencies are powered using a technological platform called the Blockchain network. The LuxTag Project noted in January 2019, “Blockchain is a decentralized, distributed ledger that stores transactions sequentially. It can be thought of as a database that is shared across a public or private network. The Bitcoin blockchain is an example of a public network. Each user on the network has a copy of this shared database, which makes it impossible for a malicious user to modify or change the contents of this database.”

As Blockchain uses cryptography, all the operations in the Blockchain are secure and anonymous. The significance of Blockchain technology came to light after Bitcoin became a global phenomenon.

Bitcoin: The first crypto

Launched in 2008, Bitcoin (BTC) is the first cryptocurrency. Since its launch, Bitcoin prices have fluctuated unlike any other asset class. The success of Bitcoin led to the creation of different crypto tokens linked to Bitcoin. Such currencies are called Altcoins.

Bitcoin was trading around $132 at the end of April 2013. But after the BTC halving event in 2016, the crypto reached a peak of $19,800 in December 2017. After its record high in 2017, BTC prices began to drop because of price corrections.

In January 2019, BTC was trading at around $3,700. It shot up in the first half of 2019 to reach a yearly high of $13,300 in June. Since then, it has been on a bear run and was trending at $6,600 on November 25. The tide reversed in the third week of December when Bitcoin prices gained over 10% within a day and hit the $7,000 level.

An intro to Ethereum

Another popular cryptocurrency is Ether (ETH), a token associated with the Ethereum platform. The Ethereum platform created a revolution in Blockchain tech and ushered in the age of Blockchain 2.0.

Its smart contracts feature can automate transactions in the Blockchain. Smart contracts are predefined codes programmed for execution after the specified event takes place. Using smart contracts, developers can automate routine tasks within the network. They operate through an interface called dApps (decentralized applications).

Numerous cryptocurrencies have appeared on a frequent basis. However, not all virtual currencies achieve the same level of popularity as Bitcoin or Ether. There are reasons why these two virtual currencies have become prominent.

Whereas Bitcoin is the pioneer cryptocurrency, Ethereum is a virtual token backed by EEA (Enterprise Ethereum Alliance). The EEA is an association of global tech giants, which includes Microsoft, J.P. Morgan, Accenture, Intel, and many others.

Investing in cryptos

Now comes the exciting part about cryptocurrencies—investing and trading in cryptos. Startups worldwide can raise funds by issuing crypto tokens, similar to how companies raise funds in a stock exchange by offering shares to investors. These shares confer voting rights to the owner and entitle them to receive dividends from the company.

On the other hand, a startup can raise funds by issuing crypto tokens. Crypto tokens have perceived value, which is tradable through a crypto trading portal. Unlike stocks, token holders do not have any ownership rights over the startup or its assets.

The process of raising funds for a company is called an IPO, and the token issue by a startup is known as ICO (Initial Coin Offering). ICO launches are the perfect places to pick budding startups and potential crypto investments.

Crypto investors can generate tremendous yields. However, the extreme price volatility might seem daunting to some. There is also the risk of ending up in a crypto fraud. So, how does one select the best ICO to invest in? What kind of research should an investor do before zeroing in on one of the diverse options available? Matters become more complex when you include the opinion of friends and colleagues on which crypto coin is best. Let’s look at some guidelines for crypto investing.

Read the white paper thoroughly

A white paper is an official document released before the Initial Coin Offering process. It is a detailed record of the startup and the business model adopted, specifics about the coin issue, denominations of the tokens, and so on. It also discusses the services backed by the virtual token.

A white paper is similar to an information memorandum issued during an IPO. Just like the prospectus explains the intricacies of an IPO, a white paper is a comprehensive guide for crypto investors.

In most cases, a newly launched virtual currency supports a particular product or service. Preferably the investor should have some idea of the sector that the startup plans to evolve in. A white paper can shed light on how the issuer intends to address the problems in the sector with the token launch.

Sometimes, cryptos can aid in working capital management. In other cases, it can act as a means of value for buying specific features of a product or an entire product as a package deal. If the token services are relevant in the market, then there is a chance the currency could have a high demand.

In many cases, investors can buy goods or services backed by the virtual token. For instance, a cryptocurrency called PotCoin (POT) supports the legalized cannabis industry. POT token holders can use this as a medium of exchange to buy and sell cannabis products. According to Coin Market Cap, PotCoin had a market cap exceeding $1.25 million on December 29.

The circulating supply or the market cap

Stock market analysts use market capitalization as one of the metrics to compare stocks. The same logic applies to cryptos. Circulation supply refers to the total value of the virtual token, typically represented in terms of US dollars.

A higher market cap denotes the token’s demand. Currently, Bitcoin has the greatest market cap among all other cryptos, followed by Ethereum. According to Coin Market Cap, on December 30 the Bitcoin market cap exceeded $135 billion, followed by Ethereum at $14.5 billion.

Market cap is the product of price per token and the number of tokens in circulation. So digital coins with low prices have a smaller market capitalization. An investor might encounter three different quantitative metrics—circulating supply, total supply, and max supply. If equated to stocks, this is the same as authorized capital, issued capital, and paid-up capital.

Max supply is the total number of tokens minable, similar to authorized capital. Aggregate supply refers to tokens in existence, like issued capital. Finally, the circulating supply refers to the tokens held by the general public. The tokens traded in the crypto exchanges (like paid-up capital) is also an indication of circulating supply.

While tracking a portfolio of crypto investments, an investor must keep in mind that the current price of the token is an estimate of the perceived value. It is not a price derivation by valuing tangible assets. Instead, it is a tradable value on the exchange. A negative perception could lead to a drop in prices in the short term. The risk exposure increases if the objectives of the startup are unclear.

A crypto’s trading volume

You could say that many of the indicators for analyzing stocks also works in the crypto domain. The trading volume is another viable indicator of a cryptocurrency’s demand. Portals like Coin Market Cap display the trading volumes of the virtual currency for different time intervals.

Typically, if a virtual coin is traded regularly on multiple crypto exchanges, you could count it as one of the genuine cryptos. Regular trading volumes indicate that the coin has a substantial investor base as well as a positive perception in the crypto trading community.

A word of caution—do not go overboard if you see sudden spikes in a dormant token. It could be an attempt for a pump-and-dump scheme. In our view, it’s strongly advisable to stick to cryptos with a history of consistent trading volumes and a reasonable market cap.

Although there are many stories about people buying crypto coins at a low price, and eventually, the value of the currency skyrocketed. But these are rare and isolated incidents. There many more incidents when people were scammed after such investments. Rather than exposing your funds to risky tokens in the unregulated space, it is advisable to stick to stable tokens.

How developers perceive the token

As the opinions of market gurus are important for stocks, every crypto investor should be open to the views of the crypto community and developers. Anyone with a basic idea about programming can create a new cryptocurrency. So, the safest bet for an investor is to track the token developer’s activities.

Online forums and crypto communities are the platforms to market ICOs and for sharing crypto updates. Prospective coin issues are a point of discussion on public repositories like GitHub. An investor should research the developer’s background from such sources. Other factors worth investigating include the frequency of updates in the business objectives, additional features releases, and the history of the developers.

Altcoins work in tandem with Bitcoin and use the same code as Bitcoin, albeit with some changes. However, not all of these currencies are as successful as Bitcoin.

Community presence

Because cryptos have perceived value, a token quoting at a higher price is more popular. This is a significant indicator of a successful crypto token.

Before investing, one should become familiar with the reactions of the crypto community in general. A good community support base assures some perceived long-term benefits. Some of these sources include Reddit and BitcoinTalk. In my opinion, investors should never become complacent about a token by relying on the general comments on social media platforms like Facebook.

Conclusion

Every investor should look at crypto investments with a long-term growth objective. It has immense potential to reshape the sector-wise recording and execution of transactions.

The tips we’ve compiled in this article are not ways to make a quick buck. These tips won’t turn you into a millionaire within a month. However, they can guide you toward making sensible investments and help keep you away from potential scams.