Last updated on September 21st, 2017 at 09:30 am
Today’s topic is altcoins and ICOs. In this episode, we’re going to go over some of the different cryptocurrencies out there and explain what are ICOs. So let’s get started!
Altcoins, or alts in short, are cryptocurrencies that are not Bitcoin. The word altcoin is an abbreviation of alternative coins. So Litecoin, Ripple, Dash or any other non-Bitcoin cryptocurrency all fall under the category of altcoins.
Now you may ask yourself, “Why do we even need altcoins in the first place?” The answer is simple: Bitcoin is not perfect. Usually, altcoins will try to create a better or different version of Bitcoin.
For example, Litecoin is an alt that confirms transactions faster than Bitcoin. Dash and Monero are altcoins that focus on the anonymity aspect, making transactions virtually impossible to trace. Each altcoin has its own “unique thing” it does best.
Altcoins can also vary from Bitcoin in the way they are mined. For example, Bitcoin’s mining algorithm is called SHA-256, while Litecoin’s mining algorithm is called Scyrpt. Different mining algorithms require different types of hardware to mine.
Another thing to keep in mind is that if an altcoin is relatively new or not that well known, it will probably be harder to buy and will have fewer wallets that support it.
Until today, thousands of altcoins have been introduced to the market, but only a handful have managed to gain a significant following like Bitcoin. One way to figure out which altcoins are gaining popularity is by measuring their market cap.
A Market cap means how big is a coin’s market in dollar terms. It’s calculated by taking the number of coins in circulation and multiplying it with the dollar exchange rate. If, for example, there are 16 million Bitcoins in circulation and the price of one Bitcoin is $2,500, the market cap for Bitcoin would be 40 billion dollars.
For a long time, Bitcoin’s market cap accounted for 90% of the total cryptocurrency market cap. Today, as more altcoins are gaining attention and appreciating in price, Bitcoin’s market cap makes up less of the total cryptocurrency market cap which has managed to surpass 100 billion dollars in 2017.
How do you actually decide in which coin to invest?
First and foremost, I suggest you read about the altcoin you’re interested in. Make sure you understand what makes it unique and see if it makes sense to you. Most importantly don’t invest in a coin just because of the buzz around it.
Many coins out there employ what is known as “pump and dump” schemes. This means the coin’s creators generate a lot of hype about a specific coin in order to get people to invest in it and inflate the coin’s price. Once the coin appreciates in value the creators sell all of their coins at a profit while crashing the price due to the massive sell off. This leaves the majority of investors with a bunch of useless coins and no one to sell them to.
Other stuff you should look into include the coin’s market cap—this will give you an idea of how well this altcoin has been received in the community.
I would also suggest getting involved in the coin’s community. Usually, most major coins have an official forum, a Facebook group, a subreddit and other places of gathering where you can ask the developers of the coin specific questions. A strong community is an important predictor for a coin’s success.
Now you know what altcoins are, and we can move on to our next topic which is closely related—ICOs.
What is an ICO?
ICO stands for initial coin offering. The term derives from the traditional finance term, IPO (or initial public offering).
An IPO is used to describe the launch of a new company on a stock exchange, also known as going public. The purpose of an IPO is to sell stock in the company in order to raise capital from the public.
ICOs on the other hand sell coins, also known as tokens, as a way to fund a specific project. The general idea is that if you believe the project will succeed, you buy the tokens that power the project beforehand at a discount, and then you will be able to sell them later on at a profit once their project succeeds.
Let’s break this process down a bit further.
When a cryptocurrency company wants to launch a new project through an ICO, it creates a whitepaper. The whitepaper is a document that states what the project is about, what needs the project will fulfill, how much money is needed for the project, and how long the ICO for this project will run for.
After the ICO is set up, the public can start investing in the ICO by sending money to the project and receiving project tokens or coins in return.
If the money raised by the ICO does not meet the minimum funds required by the whitepaper, the money is returned to the backers, and the ICO is deemed to be unsuccessful. If the fund’s requirements are met within the specified timeframe, the founding team will now get to work and bring the project to life through the use of the funds raised.
To sum it up, ICOs are like Kickstarter for crypto projects.
The best example of a highly lucrative ICO was the pre-sale of Ethereum tokens. In mid-2014, one Ether token (also known as ETH) sold for around 40 US cents . If you bought one hundred dollars’ worth of ETH back then, you would have the equivalent of 75,000 dollars in 2017.
Today, more and more projects try to mimic the success of Ethereum’s ICO. ICOs are conducted over the Ethereum platform, and that’s why you’ll need to buy the Ethereum token, known as Ether, in order to participate in them.
The recent high volume of ICOs caused Ethereum’s price to spike and also overwhelmed the Ethereum network. This caused delayed or failed transactions, leading to the suspension of Ethereum trading in several exchanges and problems with ICO funding.
The worst example of a disastrous ICO is The DAO. The DAO, or decentralized autonomous organization, project managed to raise $150 million worth of Ethereum. However, shortly after the ICO ended, a hacker managed to drain a third of the amount raised due to a bug in Ethereum’s code.
This crisis and the different opinions on how to handle it led to a split in the Ethereum network and the creation of both the Ethereum and Ethereum classic altcoins.
Just like with any other financial instrument, where there is the possibility for great reward, there is great risk as well, and ICOs contain a huge amount of risk.
ICOs can be considered as high-risk gambles on cryptocurrency startup companies. Many people today invest in ICOs not because they believe in the project, but because they just want to make a quick profit. This, in turn, creates a general hype before the project launches.
But as the buzz fades away, project creators and early investors want to take money off the table, so they start selling massive amounts of token. This can cause the price to sharply drop.
Another thing to consider is that the bar for creating an ICO today is pretty low. While conducting an IPO requires to comply with a lot of regulation, ICOs skip this entire burdensome procedure by raising money exclusively in cryptocurrency which has yet to be regulated.
Want to create an ICO?
Just create a shiny website outlining your concept, create a digital asset, get some crypto celebs to say nice things about it, and sell your project’s assets directly to people around the web. You don’t even have to have a working product.
These low barriers to entry bring about a massive amount of low-quality projects that will never see the light of day. This could be due to the fact that the founders lack the skills required to execute the project, or that the ICO was just a plain scam to begin with.
As you can imagine, this is a scammer’s dream come true. With a minimal investment of time and money, they can get tons of people to send them money without any legal exposure or liability to the public.
In order to emphasize the absurdness of how much “dumb” money is spent on ICOs, one developer went as far as creating a site called “Useless Ethereum Token.”
The website states:
“You’re literally giving your money to someone on the internet and getting completely useless tokens in return.
There are no ‘whitepapers,’ no ‘products,’ and no ‘experts.’ It’s just you, me, your hard-earned Ether, and my shopping list.”
Amazingly enough, even the Useless Ethereum Token project managed to raise over sixty thousand US dollars.
In some cases you may lose money in an ICO not due to an intended scam, but due to the hacker manipulation. For example, not long ago a hacker managed to hack an ICO website and change the Ethereum ICO deposit address to his own Ethereum address. This caused over $7 million to be sent to him. Of course that money is now lost forever.
To sum it up, ICOs should be considered as risky as gambling. Due to the irreversible and unregulated nature of cryptocurrency, you have virtually no recourse if an ICO turns out to be a complete scam or goes bust.
So how do you know if you should invest in an ICO?
Well, first of all, you need to know what you’re investing in. This means you should take the time to actually read the ICO’s whitepaper, research the project and founders and get involved with the community around it.
Also, make sure you understand how the tokens for the project will be distributed. ICOs which hold a lion’s share of tokens for the founders may end up selling these tokens in order to make a quick profit after the ICO ends.
Another important question to ask is how much money is being raised and for what purpose?
If there is no cap on the amount being raised, the project may get overfunded. Getting more money than you need can also hinder project development as laziness and no clear focus may arise as a result. Some projects have managed to raise tens of millions of dollars before the first line of code was even written.
Most importantly, don’t ever invest in something you don’t understand.
To sum it up, ICOs are a new form of crowdfunding which very few people understand. If you’re just getting started with cryptocurrencies and ICOs, you probably should do a fair amount of additional research before committing your money to any project, as exciting as it may sound.
That sums it up for today. I hope you enjoyed this lesson of Bitcoin Whiteboard Tuesday, and I’ll see you….in a bit.
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