To learn how to participate in ICOs, it is necessary to first understand the current issuance of cryptocurrency and how to measure your position. The main reason to participate in Altcoins is to invest in good projects and make a better return than other staples like Bitcoin. We will go through a couple of basic considerations before starting your ICO journey.
Like any startup, blockchain projects need funds to support employees, pay for resources and build their technology. To do this, many blockchain projects either use angel investor funding or raise it through a crowdsale.
The funds are them used for building projects or for the ecological growth of their communities and system. In the blockchain world, most startups have preferred to go the crowdsale route as many times the projects are open source or the founders prefer to maintain control. The first and most important consideration is to be careful of projects that are raising an inordinate amount of funds. Crowdsales are not supposed to be get rich quick schemes for founders and many have fallen prey to false promises. If you invest in a bad project, it is a rule of thumb that you will not make money.
In the blockchain world, usually projects crowdsell by issuing and selling a cryptocurrency to people who believe in the project or who think the price will go up. This crowdsale process is called an Initial Coin Offering (ICO).
The issuing of cryptocurrencies of course requires costs, which are usually calculated using cryptocurrencies. For example, when cryptocurrency A is issued, public funds are raised by receiving Ether, a different type of cryptocurrency. Assuming that one Ether can be exchanged for 1000 A, then the issuance cost of A is 0.001 ETH.
So after you buy your cryptocurrency, how do you measure how much money you have made? Here are the methods.
Crypto to Crypto Method
Let’s continue our example with cryptocurrency A. In general, after the cryptocurrency A issuance through the ICO, the coin will then be listed on an exchange where holders and other parties can buy and sell the coin for fiat currency or other cryptocurrencies. When listing, usually the initial market price will not be less than the issuance price. In our example, we would not expect A to be less than 0.001 ETH. However, under bear market conditions this is possible.
If A’s price after listing is lower than 0.001 ETH, your purchase position is broken and you have lost. If the price goes above 0.001 ETH then you have gained.
‘Real’ Fiat Method
Of course, the above-mentioned broken position is measured on the scale of the cryptocurrency used for purchase. If the scale of fiat currency is used for calculation, the situation is more complicated.
For example, Johnny bought Ether then used it to purchase A. He bought the Ether at a high price of $10,000 recently. Lisa bought her Ether earlier for $100 when it was very cheap, then used it to purchase A. Both Johnny and Lisa took part in the ICO and bought 1000 A with 1 ETH.
Let’s assume that A is successfully listed for trading, the price hits 0.002ETH, but the market price of Ether has fallen to $2,000. If calculated on the scale of the native cryptocurrency, the cryptocurrency A appreciates, not breaking the positions of Johnny and Lisa.
But for Johnny the 1000A has actually depreciated, lower than the price he bought at the time. This is because the price of Ether has gone down significantly, meaning he spent more fiat dollars to purchase Ether to purchase A in the past than if he would buy Ether to buy A now.
$10,000 -> 1 Ether -> 1000 A vs. $4000 -> 2 Ether -> 1000 A. Johnny has a broken position.
But for Lisa, coin A is not broken as she has spent less fiat currency in the past then she would spend now in the transaction.
$100 -> 1 Ether -> 1000 A vs. $4000 -> 2 Ether -> 1000 A.
Therefore, if fiat currency is used as a ruler, it is difficult to define whether your position is broken. It may be different for different investors.
Opportunity Cost
Though this is not a real way to measure your returns when looking at a single token, tracking your opportunity cost can be useful as well. If the price of A increased from 0.001ETH to 0.002 ETH, position is gained. But it may be worth seeing if another staple currency, such as Bitcoin, gained more during that period as staple coins are easier to purchase.
This is a small consideration to take before you jump into purchasing the cool new coin on the block. For more useful information on trading, crypto and the FAB project, join our FAB Telegram below.
