How to invest in ICO 2018
ICO: devil stuff or sensible investment?
As a result of the increasing popularity of cryptocurrencies, another term has been making the rounds for around 24 months: "ICO". Behind the acronym is the term "Initial Coin Offering", which can be described somewhat awkwardly in German as "First Coin Offering". The term is based on another popular acronym from the world of stocks and finance: "IPO" (Initial Public Offering).
The "Initial Public Offering" describes the IPO of stock corporations, when companies collect money on the capital market for the first time and issue shares for it. Before that happens, however, it will take years of preparation and the support of expensive investment banks. The IPO is usually reserved for the larger companies in a country.
In contrast to the IPO, the Initial Coin Offering is aimed at a much wider audience. Primarily to all companies that specialize in blockchain applications. This is the key technology behind cryptocurrencies like Bitcoin and Ethereum. These companies collect money from investors via the Internet in return for coins, also known as tokens. These tokens are basically comparable to bitcoins and similar cryptocurrencies. They are digital currencies. The use and value of the coins fluctuate very strongly.
Also read:Ripple: Why the Bitcoin Rival Has a Future
How to know the value of a token
The design of the coins is the sole responsibility of the issuing company. On the one hand, the coins can be linked to actual shares or the increase in value of the issuer. Much more often, however, these coins are completely decoupled from the success of the company. In the first case, the parallels to an IPO are particularly clear and the Bafin (Federal Financial Supervisory Authority) attaches higher requirements to an ICO.
In most cases, however, it applies to ICOs that they are little or not regulated, while the regular capital market is strictly monitored across borders. There are extensive reporting and control systems for listed companies, banks and dealers. This high security, or in other words monitoring status, is missing with ICOs.
Much skepticism about initial coin offerings
The consumer advice center Baden-Württemberg is very skeptical for this reason and warns: "You give your money without the prospect of participating in the company, but still carry a total risk of loss. Therefore I can only warn you very explicitly against investing money here", warns Niels Nauhauser, Head of the Retirement Provision, Banks and Loans Department at the Baden-Württemberg Consumer Center.
But the rapid development of Initial Coin Offerings continues unabated. In the first few months of 2017 there were practically no major ICOs. Then the picture changed suddenly. The volume has risen sharply since May of last year. In December 2017, the market cracked the one billion US dollar mark for the first time. The strong upswing ran parallel to the exuberant price development of Bitcoin and many other crypto currencies.
But even if these cryptocurrencies experienced a severe setback in early 2018, the ICO volume continues to flourish. The record for the largest placement so far has been held by the instant messaging app "Telegram" with a volume of around 850 million euros. A tremendous value for a completely unregulated market. This shows that consumers have great confidence in the information provided by companies. But an old saying goes: "Trust is good, control is better". When does that matter more than when it comes to your finances?
Build trust on a voluntary basis
Some independent platforms are experimenting with voluntary review portals. Experts give their assessments of the quality of the founding team, the founding idea and feasibility. Voluntary KYC (Know Your Customer) procedures are also available. Founders can have their identity confirmed and thus hope for a little more trust.
Overall, these voluntary procedures are of course very reminiscent of all procedures that the state prescribes for the financial sector. Because this market obviously does not function entirely without control. It remains to be seen whether states will have to regulate more or whether a voluntary solution will prevail. However, a sustainable solution is urgently needed to protect consumers. Over 1,300 young companies worldwide, from very different industries, are currently on the way to their Initial Coin Offering.
The German start-up Savedroid has just successfully ended its ICO. The managing director Yassin Hankir is very satisfied in the interview: "The Savedroid-ICO has exceeded our expectations by far. We are happy and very proud that we were able to win over 35,000 international token buyers for Savedroid."
Playing with fire?
Beginners often burn their hands with the first shares on the capital market. Many experts see this as an investment in the future. Private investors have to "learn the hard way" and gain experience. The consumer advice center fears, however, that in the case of ICOs there is little useful to learn: "You cannot learn anything from investing in ICOs that would be beneficial in any way. In contrast to an initial public offering, buyers of an ICO do not receive any rights to a company . They give their money without any prospect of participating in the company, "explains Nauhauser.
Savedroid boss Hankir naturally sees this in a more nuanced way, but can understand the motivations of the consumer advice centers, "because the ICO market is currently very opaque". But it doesn't have to stay that way. He sees ICOs as "the key for innovative German start-ups and medium-sized companies" that could close a serious gap in risk capital financing.
However, the industry is currently plagued by numerous fraudulent activities and only if "we can work together to establish higher quality standards and thus make the ICO market sustainable" does Hankir see a long-term opportunity for the market.
Despite all the criticism, the success of Initial Coin Offerings continues unabated. This also attracts larger investors to the stage. Family offices, i.e. asset managers for rich families, are looking for alternatives to the traditional capital market in the young market. You invest significantly higher sums. While it is estimated that private investors put 100 to 500 euros per person and ICO on the table, the amounts from family offices range into the millions.
A kind of self-protection in the young market
Still, the market protects consumers a little from itself. The first few trades require a steep learning curve. Many new terms, different providers and methods make it difficult to acquire the first tokens. Many inexperienced investors could already hold off these initially complicated steps.
The biggest point of criticism remains that millions of euros often flow in without meaningful consideration. The investors trust in the success of the founders and the associated increase in the value of the coins. However, when established companies go public, they usually have a mature, if not yet profitable, business model. Many ICOs are still a step ahead.
The founders sell their idea, but mostly have not yet tried it out and implemented it. Investors are thus taking a significantly higher risk. Not least for this reason, South Korea was one of the first countries to ban ICOs in the autumn of last year. In addition to the high risk of loss, the regulators also cited the frequent attempts at fraud and hacker attacks as the reason. At every "reputable" ICO, numerous scammers with similar names and fake websites try to steal money, but the Koreans are now considering easing the ban.
The call for regulation is getting louder
Big neighbor China is increasingly skeptical about the issue and has banned all ICOs. The list of states with complete bans is short, but many governments are very critical of the issue. Due to the explosive development, politics can hardly keep up with regulation. Many European countries are comparatively open to ICOs. The USA, on the other hand, is on the verge of strictly regulating ICOs in line with the IPOs. Japan, Australia, Canada and even financially liberal centers like Hong Kong and the United Kingdom are also planning tighter regulation.
Private investors just have to wait and see the market. The future development is still completely open. As in many emerging markets, early investments promise substantial returns. You should always be aware of the high (total loss) risk. However, consumer advocate Nauhauser does not rely on long-term success: "With all the understanding of a certain skepticism regarding the stability of our monetary and financial system: privatizing money is really not a solution."
Would you have fallen for it?
The founders market their innovations in the travel industry on the website "www.howeycoins.com". As an investor, you can benefit from the company's success and the tokens through the Howeycoins. The website shows a nice story and lots of nice pictures.
If you click through the site and really want to invest, you end up with the SEC (Security Exchange Commission), the American stock exchange regulator. She started the site to show how easily potential private investors can be fooled by stories and pictures. Instead of making a purchase, readers are redirected to the SEC's official website and read in bold "You Could Have Been Scammed".
So-called robo-advisors are a suitable alternative for those who do not want to or cannot design their financial investments themselves. There is asset management, custody account management, transaction and fund costs for less than one percent of the investment volume. You can read exactly how digital asset managers work in our Robo-Advisor guide.
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