Initial coin offerings (ICOs) are growing in popularity because of the huge returns investors can make in a short period of time.
For example, owners of the coin for Populous, a peer-to-peer invoice platform built on blockchain technology, made a 15,955% return since the company's June ICO, according to ICOStats.com.
However, investing in ICOs is still extremely risky...
In November, the "cryptocurrency startup" Confido raised $375,000 through a coin offering. It said it was creating smart contracts, which we'll discuss more in just a bit.
But the Confido coin offering was just a scam.
The website and social media pages for the company have been deleted, and no one can find the founders, according to CNBC.
Now, Money Morning Director of Technology & Venture Capital Research Michael Robinson believes you can make money through investing in ICOs. The caveat, though is knowing the right ICOs to invest in.
We want our readers to understand how these coin offerings work to see if they deserve your hard-earned money...
What You Need to Know Before Investing in ICOs
In an ICO, a company creates a new cryptocurrency to raise funds. These funds are supposed to be used to pay for innovative projects or get that company's business off the ground.
Investors have different reasons why they would want a new crypto coin.
They could just believe in the company and want to support it.
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But like with any other investment, most are just looking at how they can receive a sizeable return. These investors are looking at companies with outstanding business ideas or that are issuing coins that will be valuable in the future.
For example, Ethereum is a cryptocurrency whose investors believe will be in demand in the future, raising the price of the coin.
The underlying technology for Ethereum can be used for smart contracts, which can store payments and paperwork together.
Through a smart contract, someone can create a last will and testament that they can encrypt. This encryption allows the user to control who can access it, keeping it secure from anyone but the family members and lawyers they choose.
But the real power behind a smart contract is that it can make payments automatically.
The deceased could set up their smart contract to automatically pay out a certain percentage of their money to their children until they become 18. That would prevent the funds from being stolen or mismanaged.
These types of capabilities could make Ethereum the preferred payment of choice for smart contracts, and that would send the demand for Ethereum higher.
As demand for Ethereum's secure contracts rises, the price of the coin goes up, making investors' coins more valuable.
Other investors are just speculating the hype around blockchains and cryptocurrencies can make their new coins worth more.
One of the most surprising ICOs that actually gained traction was the Useless Ethereum Token (UET). On its website, UET says it "transparently offers investors no value, so there will be no expectations of gains."
However, that didn't stop investors from driving up the price from $3.98 on July 5 to an intraday high of $58.03. Of course, the price collapsed and now is trading at $0.01.
This ICO may sound silly, but it's a sign of how speculators are hoping to score quick profits from the hype surrounding cryptocurrencies.
"People mistakenly believe that investing in virtually any cheap cryptocurrency today will make them a millionaire tomorrow," Money Morning Cryptocurrency Expert Dave Zeiler said on Sept. 7, 2017.
To avoid hype and to find the best profit opportunities, Robinson has three rules for investing in ICOs.
Through his guide, you'll be able to protect your money and find the best ICO investments to grow your net worth...[mmpazkzone name="in-story" network="9794" site="307044" id="137008" type="4"]
Investing in ICOs, Rule No. 3: Separate the Signal from the Noise
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. On 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 it has a compelling business model and that it isn't hemorrhaging money.
Top 5 Cryptocurrencies to Invest In Today
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. 2: Great Companies Have Great Operations
Robinson recommends going to the website of the company offering 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.
If the information isn't readily available or the leaders have thin resumes, Robinson says to move on.
Investing in ICOs, Rule No. 1: Focus on Growth
When you invest in a company, you want to know what it will do with your money to make your investment more profitable.
Will the company use it to advertise more to attract more customers? To hire more employees to grow its 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 projects 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.
Speculators might buy this coin hoping it'll turn into the next Bitcoin, but that's a risky strategy.
When you're considering investing in anything, you have to understand how your investment can increase in value.
As we mentioned earlier, 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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