With blockchain becoming a buzzword for digital investors, many people are interested in how they can get into the cryptocurrency market. Initial Coin Offerings, or ICOs, are a hot topic of debate in the blockchain community. But while some have seen huge growth from ICOs, it’s important not to be misled. By knowing what ICOs are and staying informed, you can avoid the risks.

What is an ICO?

Put simply, it is an Initial Coin Offering (ICO), which some compare to an initial public offering. ICOs crowdfund capital for their startup, receiving investment in more established cryptocurrencies like bitcoin and ether.

The benefits are two-fold: the new cryptocurrency can sometimes see initial investment in the millions, which establishes market trust and drives further investment. For the investors, shares bought low can see exponential growth over time.

So what’s the problem?

Calculated Risk

As with all startups, there are risks to investing. For starters, not every newcomer is offering a secure network that can fulfil a new type of process. Some are simply copying other crypto models and hoping to establish market trust through the ICO process.

Charles Hoskinson, ethereum network co-founder, warns against overinvesting in ICOs: “People say ICOS are great for ethereum because, look at the price, but it’s a ticking time-bomb.”

The issue at hand is over-tokenisation of new digital coins. And with start-ups rushing to market to cash in while buyers are flocking, Hoskinson worries that this could cause hype that could potentially cause a blockchain assets bubble.

Warning Signs

It is most important to stay informed when investing in ICOs. Stay on top of new offerings by subscribing to forums. Find out whether new offerings have something more to offer, other than just another white paper.

Be suspicious of anything too good to be true. If the ICO promises large gains or more coins than seems reasonable, it is possible they plan to ‘pump and dump’. If you have to invest ‘right now’, a fraudulent practice is likely.

Know what your investment will be used towards. Know whether they are a registered with the SEC, as the Security and Exchange Commission is incredibly wary of ICOs that are veiled fraud schemes. A more comprehensive list of warning signs can be found here.

Should you invest in ICOs?

With the SEC looking to extend legislature to prevent cases of fraud or security from loss, it is important to be more than careful. That being said, greater SEC reach means that cases of ICO investment failure will become less likely as offerings are held accountable.

Advice on the matter tends to be the same wherever you go: be patient, be cautious, and do as much research as you can. The world of cryptocurrency investment is fundamentally a game of information. Should you not remained informed, you can’t hope to be investing wisely.