Initial coin offerings (ICOs) have raised more than $1 billion in the last three months, but investing in ICOs is still considered the "Wild West."
Companies issue their own cryptocurrency to raise money, but not all coin offerings are the same.
Sometimes an ICO is simply to create a new coin its founders think will be innovative. Other times it's because a business wants to raise money. Issuing a coin that can be used in exchange for the company's services is a simple way to do it.
The hope for speculative investors is the new cryptocurrency they own will rise in value as the company offering it finishes projects with the raised funds.
But investors just trying to make a quick buck can lose their hard-earned money in a matter of hours. According to an Aug. 28 CNBC report, the SEC has suspended trading activities of four over-the-counter (OTC) companies on concerns of their "accuracy" of information or "value" of assets.
However, Money Morning Director of Technology & Capital Venture Research Michael Robinson still believes you can make money by investing in the right ICOs.
And to help our readers navigate this new investment vehicle, he has three tips for investing in ICOs.
Through this guide, you'll be able to protect your money and grow your net worth...
Investing in ICOs, Rule No. 3: Great Companies Have Great Operations
"Each and every one of our investments must be well run by top-notch leaders," Robinson said.
Robinson recommends going to the website of the company offering its coins and looking up the executive team and the board of directors.
If the management is transparent, you'll be able to learn how much experience they have working with digital currencies and blockchain technology.
"I never recommend a stock without drilling down to find the track record for the CEO and executive team. I'm looking for leaders with years of proven success in managing tech firms - and making money for their investors," said Robinson.
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If the information isn't readily available or the leaders have thin resumes, Robinson says to move on.
And for his next tip, our tech guru shows you how to not get caught up in hype like so many other investors...
Investing in ICOs, Rule No. 2: Separate the Signal from the Noise
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"To create real wealth, you have to ignore the hype and find companies that have rock-solid fundamentals," Robinson said.
To make investments seem more appealing, companies will hire celebrities to endorse their products.
And the celebrity ICO and cryptocurrency market endorsement trend is ballooning in 2017...
On Sept. 19, actor Jamie Foxx promoted the token sale of Cobinhood, a free cryptocurrency exchange. Just yesterday (Sept. 28), music producer DJ Khaled held up the cryptocurrency debit card Centra in an Instagram post and called it the "ultimate winner."
But remember, companies will reach out to these influencers because they have a large audience, not because of their digital currency knowledge or expertise.
Instead of being lured in by a celebrity or other hype, make sure you check out the company's financials to see if they have a compelling business model and they aren't hemorrhaging money. Having a great idea and the know-how to make it happen is much more important than having the latest celebrity involved.
"This rule exists specifically to avoid the hype machine that dogs the investment world. That's hard to do with ICOs these days because so many celebrities - from Paris Hilton to boxing great Floyd Mayweather - are touting them."
Investing in ICOs, Rule No. 1: Focus on Growth
"Companies that have the strongest growth rates almost always offer the highest returns," Robinson said.
When you invest in a company, you want to know what they will do with your money to make your investment more profitable.
Will they use it to advertise more to attract more customers? To hire more employees to grow their operations? To build new data centers?
Now, this is hard to do with ICOs.
Many companies offering coins will only have vague explanations of why they are raising money to fund their project using a coin offering. Most won't have detailed explanations on how they can make your investment more profitable.
For example, the website for the digital currency "TrumpCoin" says, "Our community would love to use TrumpCoin as a worldwide grassroots fundraising tool for projects the president deems fit for improving America."
The site does list its first project as "contributing to the southern border security project between the United States and Mexico," but it's not clear how the value of TrumpCoin can increase.
When you're considering investing in anything, you have to understand how your investment can increase in value.
For example, the underlying technology for Ethereum could completely disrupt the real estate industry.
Instead of having down payments and contracts separated, Ethereum technology could make it possible to send a payment and the paperwork for purchasing a home all within a "smart contract."
While Bitcoin is more of a storage of value right now, ETH is being used by developers to pay for transaction fees and services on the Ethereum network.
Ethereum could become the preferred payment of choice for these smart contracts, which would send the demand for Ethereum higher.
Cryptocurrency investors are already driving up the price of Ethereum on the expectation that it will transform the contracts industry. So far in 2017, the price of Ethereum has skyrocketed 3,595%.
Ethereum's growth and potential to disrupt an entire industry is the type of coin investors should be looking for. That means ignoring the hype and short-term price spikes and looking for strong companies with well-designed plans.
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