The crypto markets are flooded with new ICOs every week. ICO stands for “initital coin offering”, which is a way for developers to fund open-source projects. These crypto crowdfunding projects are raising millions of dollars in the span of a few days. This whole phenomena is starting to look like the dot-com bubble of the late 90’s.
The ICO mania is likely due to early Ethereum adopters making serious returns after the last bull run. During the Ethereum ICO in 2014, investors received 2000 ether for every bitcoin. That works out to an ROI of 74.4 bitcoins if cashing out at peak prices!
There’s a lot of amazing technology being created with decentralized applications and ICOs are a way for users to fund the ecosystem. That said, turning a quick buck is likely the main motivation for most participants.
Personally, as an investor and trader I’m conservative about where I send my money and am not jumping on to the ICO bandwagon. Here are my reasons:
#1: The more people who buy the lower your chances are of making ROI
Not everyone in the crypto community is into ICOs and the ones who are tend to be the main investors. If most of the limited buyers are priced in during pre-release then who’s left to buy once they hit the exchanges?
Also, many ICOs divide the available coins amongst the participants so the more people who invest, the most expensive the coins become.
The most recent ICO is called DAO and they have an uncapped supply based on a fixed rate of 100 DAO for 1 ether. During the first four days of the ICO they’ve managed to raise $14.41M USD, creating 150.74M DAO tokens.
So lets calculate the fundamentals:
- Current price per DAO: 0.000215 BTC
- Marketcap: $14,454,458 USD
- Placing it as: #8 coin for marketcap
So at its current valuation this coin has made it to #8 for marketcap and it hasn’t even been released yet. There are still 24 days left for this ICO, which means the marketcap will only continue to rise.
In my opinion the current cost of DAO is overpriced, making it highly unlikely that it will retain this value upon release. Although the price is fixed to the market rate of ether, the supply is undergoing hyper-inflation. This coin hasn’t even put in its time for it to be the #8.
I suspect that the only place for the price of this token to go is down. On opening day during price discovery many traders will likely race each other to dump on the exchanges.
#2: Smart Money Tends to be Contrarian and goes against the herd
Smart money tends to be contrarian and patiently waits to exploit markets inefficiencies. They buy undervalued assets when everyone is panicking and short when bubbles are at their peak hype.
If I want to turn a profit from any of these coins I’ll patiently wait till everyone panic dumps and buy at prices much lower than the initial sale price.
#3: ICOs pull liquidity out of the crypto markets
There are a limited amount of crypto traders and investors and this constant barrage of ICOs is pulling millions of dollars out of the markets. This can have the effect of lowering trading volume as well as diluting the markets with more coins.
Investors from older altcoin projects are left as bagholders as they see the value of their coins diminish over the long haul. Most altcoins are a poor long term store of value, which is why serious traders know that Bitcoin is to gold standard of crypto.
#4: ICOs tend to overvalue development
How much money does it really take for developers to write code? Many of these ICOs are raising tens of millions of dollars to “cover operational expenses.” As investors perhaps we need to see an actual breakdown of these operational costs. It appears that the majority of the money spent are on salaries.
The national average salary of software engineers in the US is around $74K. The best paid salaries are around $127K. Even with a full staff, explain to me why any project needs $18M in funding for a couple years of development?
Also, the developers tend to keep anywhere from 10-20% of the token supply for their own pockets. When these developers sell their coins we have no idea if they market make, sell OTC or dump on their followers.
Many of these projects will convert most of their bitcoins and other coins into fiat which puts selling pressure on the markets. This is another hidden cost that people in the community have to pay.
Just to put things in perspective, Bitcoin’s developers all work as volunteers.
Conclusion
Although we’re likely in an ICO bubble, many of these projects still offer great innovation. As a trader I’m not against developers turning a profit but as an investor I expect the best value for my money.
There still may be the odd ICO that gives early adopters ROI but with all the hype I think most of them may lead to a loss. I’ll trade any coin that moves but doubt that most of them will make a good long term investment.
Caveat emptor
Rocky
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