1. The lock-up period
Once you send your ETH to these ICOs or IEOs, it takes many months before you actually receive their token. The opportunity cost of waiting six months onward can mean missing out on hundreds, if not thousands of percent ROI, especially during a trending bull market. This happened to me: I sent my ETH when it was around $200 to a project which I won’t name, just to see ETH go to over $1,000 over the course of the next few months and I still did not receive their token.
They probably capitalized on that ETH gain and then decided nine months later to send their tokens out… during the 2018 bear market. You’re probably thinking,”You probably didn’t do any due diligence,” but I did. I read through their entire whitepaper, followed/studied their team and understood the structure of the ICO. They just took far longer than promised with the deliverability of their token, which caused me to miss out on a serious profit.
2. The structure of ICOs
Of course, not all ICOs are structured the same way. However, the vast majority follow this structure and unfortunately it hurts the little guy (us) the most. ICOs are normally done in a few rounds, you normally have a seed round, a pre-sale, then a public sale. Sometimes there are a couple more rounds, sometimes less.
Unfortunately, unless you have at least $10,000 to invest in the seed round, and you are an accredited investor, it is unlikely that you will be able to invest in the very early stages. This is what I don’t like, and the reason is due to the bonus structure. Most seed rounds offer a significantly higher bonus than all other rounds – for the sake of ease, let’s call this a 100% bonus.
Banker Billy decides to invest $100,000 into this seed round, and is guaranteed a bonus of 100% just by investing so early on. Billy is happy with this as he has an evil plan…
The second round, or the presale, is where most people get caught out. ICOs often promote attractive bonuses on a tight timeline to ensure urgency/scarcity. For example, if you invest this week you will get a 50% bonus but next week is only a 25% bonus etc.
Small investor Joe decides to invest $1,000 in the 50% bonus, pretty confident that he will be in profit.
The final round offers insignificant bonuses, maybe 10%. This is where the average punter Paul sticks a few hundred dollars in, not really caring about the outcome. They buy and hold for life.
Now the funding has ended and Billy, Joe and Paul are all waiting for their tokens.
Billy receives his tokens first, and also knows which exchanges the token is likely to be traded on first. Billy has his sell order at market ready, as he knows he will lock in a massive profit.
Joe is keeping a close eye on which exchange this token is likely going to be listed on, ready to act if needed.
Paul on the other hand, is down the pub telling everyone about this ICO that’s about to make him a lot of money.
* The token is now tradable. *
Billy sells his entire holding, driving down the market but locking in over 50% ROI. Joe manages to sell to break even, but is now very uncertain about the token’s future.
Paul is down 50% but is confident that the “whales” are just accumulating more.
The only winners in this situation are the seed investors, who get the huge bonuses. I’ve seen this happen time and time again. For me, it is not worth the risk of investing in an ICO. Just wait until it hits the market and buy the initial dip.I’ve done this countless times and it works far better.
I’m sure there are great ICOs, and many people have made a significant amount by investing in them. But I understand how they are structured, and would rather not take that risk. This is important for both ICOS and IEOS.