4 Pros and Cons of Investing in a New Cryptocurrencies The steep rise in the value of cryptocurrencies is, depending on your risk tolerance, a compelling lure to get in or a likely sign of a coming fall.
By Deep Patel •
Opinions expressed by Entrepreneur contributors are their own.
Cryptocurrency initial coin offerings (ICOs) are gambles. They have the potential to create huge returns on your investment, but also come with great volatility and risk. Though people have been talking about the risks associated with ICOs for some time now, major financial institutions such as Goldman Sachs and JPMorgan are beginning to look at investing in the sector.
Whether you have a significant amount of capital or a little bit of extra cash, cryptocurrency is an investment worth looking into. Here are a few of the pros and cons associated with a cryptocurrency ICO.
Related: Why You Can't Afford to Ignore Cryptocurrencies and Blockchain Anymore
Pro No. 1: Massive potential for returns.
One of the statistics that makes everyone consider investing in cryptocurrency is that $1,000 invested in Bitcoin in 2013 would be worth over $400,000 today.
Recent ICOs have created a number of huge returns in a short amount of time. Stratis raised $600,000 during their ICO in June 2016, and has since seen a 63,000 percent rise in the price. Spectrecoin raised $15,000 in January 2017 during their ICO, and has since risen over 13,000 percent.
Related: Why Marketers Need to Pay Attention to Cryptocurrency -- Now
Pro No. 2: Shorter time horizon.
Since cryptocurrencies are riskier investments, it is best to compare them to angle investing and venture capital investing. Datum launched their ICO in late October 2017, having already raised $1.5 million in pre-ICO funds.
Since cryptocurrencies are network-based and Datum has already received a groundswell of support, investors know it is likely that they can begin cashing out their investments relatively quickly.
Pro No. 3: Increased liquidity.
When you purchase equity in a startup, in order to realize a profit, you need to find someone to buy the equity from you or wait for an acquisition or IPO to occur. However, none of these options allow you to control when you cash out your investment.
If a cryptocurrency ICO is able to build a solid enough network, such as the 56,000-member Datum network, investors immediately have much more liquidity and can sell their cryptocurrency for ether or dollars almost instantaneously.
Related: Just What the Heck Is Blockchain? Watch This Explainer Video.
Pro No. 4: Clear direction for execution.
Perhaps the biggest advantage of investing in cryptocurrency ICOs over startups is the fact that startups often need to pivot multiple times and overcome initial speedbumps. When you see a set of founders asking for initial capital, you should recognize that the company they eventually take public will look drastically different.
With a cryptocurrency ICO, when you invest you know exactly what the network does and will be doing. As such, you are able to more accurately evaluate the product–market fit for the platform, and can use that insight to determine your investment.
Con No. 1: Increased volatility.
Of course, when compared to investing in the stock market or even real estate, cryptocurrency ICOs are much more volatile. Issues such as hacking incidents can cause investors to lose all of their investment quickly. Granted, such drastic incidents are rare, but major drops in ICO value are not unheard of.
Related: 5 Trends In Cryptocurrency Entrepreneurs Need to Know
Con No. 2: Potential network stall.
The real value of any cryptocurrency relies on building a strong product that a significant network of users will want to use. However, if these networks either fail to attract users or never get users to actually utilize the platform, then the currency will likely see a drop-off in price. Many of the recent ICOs that failed to perform after launching did so due to a lack of network engagement.
Con No. 3: Potential shortage of resources.
Just as startups can run out of resources and be unable to continue operations, if a cryptocurrency ICO does not raise enough money or the startup spends more money than expected, the doors close and the network really takes off. Many cryptocurrencies are doing pre-ICO raising in order to have firm commitments of resources and demonstrated demand for the currency.
Related: 10 Companies That Are Getting Creative With Cryptocurrency
Con No. 4: Potential mismanagement.
Ultimately, every cryptocurrency is a startup and has a team of founders running it. In order for the cryptocurrency to effectively navigate from ICO phase to mass-market levels, it needs a solid founding team. Before choosing to invest in a cryptocurrency ICO, make sure to look into the team's background and evaluate whether they have the skill sets and capabilities to execute the project.
With new investment possibilities cropping up every day, it is critical to keep up to date with what options you have for wealth management. While portfolios need to be balanced, good portfolios tend to include some riskier assets, such as venture capital.
In the modern world, cryptocurrency ICOs offer many benefits that venture capital is lacking. When you start thinking about investing, take time to look into what ICOs are available and how their success might be able to generate massive returns for you.
