Ever since the ICO popularity boom in 2017, more and more investors have begun to invest in the ICO market. While spending in ICOs may lead to huge profits, it can also lead to a massive loss if you are unaware of the below five risks associated with investing in ICOs.
1) Absence of regulations
Regulatory bodies monitor IPOs. However, ICOs currently not under any regulatory influence. There are no restrictions for ICOs to be limited to any specific geographical location. This freedom that ICOs posses make it very difficult to regulate them.
Even the SEC has not voiced any verdict regarding ICO investments and tokens. Because of the absence of regulations and the sheer number of ICOs on the market along with the new entries, ICOs have welcomed a lot of debate over which tokens are subservient to security regulations. The regulatory bodies also have to take into account, how these laws might influence the startups the SEC later announces as non-compliant.
The safest way for investors is to invest in startups whose ICOs are associated with legal firms and limit their token sales to authorised investors.
2) Lack of due diligence and vetting
ICO rarely undergo any professional due diligence and vetting. Due diligence is given top priority in the financial industry before any investments.
Having due diligence aids the investors to understand the risks correlated with investments, grants a broad look at the company’s financial position and analysis of the company’s business model.
ICO possesses a tantamount of an investment scheme in a website or a whitepaper form.
3) The business model deficiency
Most of the ICOs do not own a proven business model, and many of them do not even have a ready product. Startups have recently begun to secure financing via ICO from anyone that has a digital wallet and an internet connection.
Experts and enthusiasts agree that investing in ICO are very ambiguous and risky. If the ICO issuer escapes with the funds, then there is hardly anything an investor can do about it.
Because of the ambiguity of ICOs, the likelihood of volatility and potential loss occurring is very high, and investors need to be ready to face it. It is important to note that the return targets written on the ICO whitepapers are just a goal and not an absolute fact.
Investors can alleviate financial risks by conducting thorough, in-depth research about the ICO. Only invest in startup ICO companies with experienced employees and a convincing business model.
4) Lack of transparency
The ICO providers do not often provide openness when it comes to the data that is handed over to the investors. Quintessential and fundamental information is either specified in abstract phrases or not at all.
This information can be the project risk, rights of the token holder, the utilisation of financing etc. Without this data, investors will not be able to determine the real value of ICO and differentiate between authentic ICOs and bogus ICOs.
The efficiency of token pricing is also affected by this lack of transparency.
5) Market manipulation and ambiguity
The investors are investing in ICOs because they believe that they can sell it expeditiously at a higher price.
The high ambiguity offered by ICOs add to the increasing price volatility. Periodic price variations of tens and hundreds of percentages are prevalent in ICO investments. On top of that, it is effortless for malicious people to manipulate the prices because the trading ability of many tokens is minimal.