The high-flying price of bitcoin has made cryptocurrencies in general a very hot commodity, and new ones keep tempting investors.
The way to get in on the ground floor of a brand new digital currency is through an initial coin offering, or ICO. The price may start at a fraction of a cent, which can be tantalizing. After all, what if this might be the next bitcoin? People who don't want to miss out pour millions into ICOs, like Kickstarter on steroids.
But unfortunately, many of these new coins are nothing more than scams. Before you put your hard-earned money into an ICO, ask yourself the following questions.
Does the company have a qualified staff?
If you look at the website for a new cryptocurrency and there is no information whatsoever about the company's founder, that is a huge red flag. If the people behind the ICO are not willing to reveal their identities, the odds of them running away with your money can be high.
Even if they have a large staff, you should be critical of their qualifications.
You may find that the majority of these companies are being created by guys in their 20s who recently graduated with degrees in computer science. You should worry if they have no background in finance but haven’t hired an expert in that field to help guide them.
Where's the 'white paper'?
A “white paper” is a document that explains exactly what the company’s mission is, and how its product or service will solve a problem. It should give a step-by-step guide to what the company plans to do in order to succeed.
As an investor, you should take the time to read the white paper of any ICO before you consider putting your money in.
Many ICOs have no white paper at all, and they believe that a cute video animation or a company blog should suffice. Without a white paper, it means the leaders aren't taking their company seriously, or that they may have very little experience in running a business.
Remember that 8 out of every 10 new businesses will fail, and that goes for the world of cryptocurrency.
What's the point of this coin?
Some cryptocurrencies are quite literally worthless.
For example, if you read the fine print of the website for the EOS coin, it has this to say about the currency’s utility: ”The EOS Tokens do not have any rights, uses, purpose, attributes, functionalities or features, express or implied, including, without limitation, any uses, purpose, attributes, functionalities or features on the EOS Platform.”
But at the time this article was written, EOS was valued around $10 per coin, and there were over $5 billion circulating in its market. In other words, people have been putting their money into a currency that, to the company's own admission, is worthless.
In comparison, the digital payments network Ripple plans to use its cryptocurrency, XRP, in transactions with banks and major corporations. Banks are eager to use XRP because they will save 60% on processing fees, versus using the U.S. dollar.
In December of 2017, Japanese and Korean banks already began using XRP in international money transfers.
Can you afford to lose?
If you are getting ready to invest in a new digital coin company, ask yourself if you can afford to lose your money if things go sour.
It’s OK to invest if you have some extra cash lying around, but never put in money that should be going toward your rent or other bills.
Investing in cryptocurrencies or even the stock market can be a lot like gambling, and it can be addicting. Remember to invest wisely, and never get in so deep that you can’t get out.
A better use of your money is to keep your savings in a high-yield account, where your earnings may be lower, but your risk is almost non-existent.