The initial coin offering (ICO) space has created many multi-millionaire investors in a short space of time since this sector first came to prominence last year. The sector exploded in popularity as companies realised that they no longer had to go down the traditional venture capital route in order to raise funds for their business.
Instead, they could retain their equity and instead issue a digital token whereby investors would contribute funds in exchange for these tokens. However, this space is risky, due to the high failure rate of these projects, as well as the high number of fraudulent token sales.
For example, there was a recent report that showed how more than 80% of token sales were deemed to be fraudulent. There is also the case of a lot of these projects being in the infancy stages, which just like with any sector is going to have a high failure rate.
It has become harder for relatively small ICOs to obtain significant funding these days. In the past, all an ICO needed was an idea and a whitepaper and they could generate millions of dollar in investment.
There are some useful strategies that can be used in order to help reduce the risk of your own ICO investments.
What are some of these strategies?
One of the recent emergences in the ICO space is partaking in specialised funds that bundle ICO investments together, thereby reducing variance and variability. A basket of ICOs are vetted and deemed to have some substance and various investments are made in them in order to provide investors a way in which they can invest in ICOs without having to physically hold the tokens themselves. As there are more highly vetted ICOs as part of this basket, the risk is naturally decreased.
The way in which ICOs are being operated is starting to shift significantly. Some people are calling it the 2.0 stage of ICOs or DAICOs. This is because instead of the ICO team receiving all of their raised funds all at once, they will instead by drip fed these funds when they reach the milestones defined in their whitepaper.
Investors will have the power over this collection of funds and if at any stage they deem that the team is incapable of delivering up in their predefined targets, the investors can have a vote and decide to have all of the funds returned to them.
This naturally provides a stronger incentive for companies to reach their milestones in a specific timeframe and also reduces the risk for investors because if things go wrong, they can have a significant portion of their funds returned to them.