In the traditional business world, private companies participate in IPOs (initial public offerings) to raise capital.
In a token sale, a project developer mints digital tokens that can be bought by investors with BTC, ETH or another cryptocurrency.
In this model, developers receive instant liquidity to kickstart R&D, while investors get tokens.
In this post, you’ll learn more about token sales, ICOs and IEOs and how to determine if you should get involved as an investor.
How much should you invest in token sales?
Investment is risky by nature, and you should always ask yourself if the money you’re putting in is money you’re willing to lose. This fact is especially true when it comes to IEOs.
In crypto, there is currently no stringent regulatory framework for token sales, and some projects looking to fundraise via token sale only perform basic KYC/AML checks to reduce their legal liabilities.
That's why you should consider only taking part in IEOs on secure, regulated, trusted platforms like Liquid. Otherwise, your funds may be at risk.
There are many bad actors out there who will happily take advantage of unsuspecting investors.
The importance of a use case
Over the past few years, blockchain has become a buzzword and an easy way for companies to get media attention.
For example, photography and imaging company Kodak announced a token sale for a blockchain-based marketplace platform for photographers. Following the announcement, Kodak’s stock price saw a price increase of over 60%.
But many speculators simply didn’t see the need for a marketplace platform that uses Kodak’s token exclusively. Going one step further, opening up the platform to other cryptocurrencies like BTC and ETH would simply kill the Kodak token’s use case.
Before investing in a token sale, it's worth taking some time to understand the nature of blockchain technology and how it can be applied to different industries.
Next, read the project’s white paper to get a sense of its viability and if what they’re trying to do is possible without blockchain technology.
Is the project fixing a problem, or is it just creating a problem to fix?
Research the team
After you’ve determined the legitimacy of a project’s use case, take some time to research its development team.
As demonstrated by Vitalik Buterin at the age of 19, launching a world-class blockchain project doesn’t require years of business experience.
But generally, you should always be on the lookout for extensive business and technical experience from members of a blockchain project looking to fundraise via an IEO.
If team members don’t have a public work history on a reputable business networking platform like LinkedIn, think twice before investing in their token sale.
How much money is being raised?
Many project fundraise off the back of little more than an idea and a basic whitepaper. In 2017, 5.6 billion USD was raised in token sales, while more than 6.3 billion USD was raised in the first half of 2018.
Many projects seek between 10 million and 50 million USD, with outliers like Telegram and EOS raising 1.8 billion USD and 4 billion USD, respectively.
A project’s resale and token sale price is seen as its “opening price” when determining market capitalization. For investors, this becomes somewhat of a tradeoff because a project that raises more money can theoretically sustain itself longer and allocate more resources to R&D.
At the same time, a project with a higher initial market cap may require significantly more money to move the price up.
Consider all these factors when investing.
Token distribution and funding allocation
After getting a sense of how much money a project is looking to raise, it’s important to dig into how they plan on using the money raised.
To do this, look for the token distribution model and funding allocation model in the whitepaper.
Token distribution refers to the percentage breakdown of how tokens will be distributed across different parties.
Funding allocation refers to the percentage breakdown of how the team plans to spend the money raised.
The key things to look out for here are reasonable token/funding distribution and transparency. If a project allocates less than 50% of tokens for public sale, that could raise a red flag.
Similarly, if a project uses a large percentage of the raised money for “operations” without being more specific about what that entails, take a moment to think about why there isn’t more transparency when tens of millions of dollars are involved.
Playing the waiting game
The final thing to consider before investing in a token sale is the project’s lockup period. This is the time between a successful IEO and the first exchange listing.
During this period, IEO tokens have near-zero liquidity, which means they can’t be exchanged for other currencies in a liquid exchange market.
The length of the waiting period depends on various factors such as development milestones and exchange listing negotiations.
IEOs hosted on Liquid, however, are listed soon after completion of a sale.
As you can see, there's a lot to consider when investing in IEOs. Before putting your hard earned money into a project, be sure to research the proposed token distribution, fund allocation, community channels and team.
If everything checks out, you might have just found your next gem.
This content is not financial advice and should not form the basis of any financial investment decisions nor be seen as a recommendation to buy or sell any good or product. Trading cryptocurrency is complex and comes with a high risk of losing money, particularly if you trade on leverage. You should carefully consider whether trading cryptocurrencies is right for you and take the time to learn how trading works and decide how much money you are prepared to lose.
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