5 Potential Risks When Investing ICO
Bo Shen, cofounder of Fenbushi Capital, delivered a speech on Hangzhou Blockchain Technology and Application Summit 2017, topic of which is The situation and outlook for blockchain investment. Fenbushi Capital is a Chinese Fund focusing on blockchain investment. The company was founded by Wanxiang Group with 50 million USD in October 2015. So far the companies have injected funds to 41 blockchain projects, 32 of which are abroad and 9 at home. Below is an excerpt from his speech on the risks of ICO projects.
Bo Shen, Cofounder of Fenbushi Capital
ICO as a funding vehicle is helpful to the development of blockchain technology. In other sectors, traditional VCs have their ways. ICO for blockchain project is an incentive mechanism designed by open-source communities for open source developers. With ICO, many open source projects could afford open source and developers involved in the project are able to get real business, This incentive mechanism is great. In the past there might be incentive mechanism for open source projects, but they are external. Only ICO provides an internal incentive mechanism.
Some statistics show that in 2016 traditional VC poured 496 million into blockchain projects while ICO gathered 236 million, accounting for half of the traditional VC investment. I think in the future ICO will keep pace with the traditional VC in terms of blockchain investment.
Of course, so far ICO has only been invented for a brief time. A project in its inception has many flaws and I can see five major risks.
The first risk is the scamming project as the funds raised are free from auditing and custody. At present a standard ICO goes like this: release a white paper and then it ends when the project is launched. There are a lot of unspoken rules. In the past two years, some people collected money through ICO and vanished soon. Cases like this is still around now.
The second risk is over-commitment. A traditional IPO requires the company to be representable to the public before its issuance. ICO is some ideas and plans written in paper. Then people are asked to pay real money. Question remains with its materialization.
The third risk is over-pricing of projects. So far there isn’t a very detailed or convincing pricing mechanism. Project sponsors name the price based on the project needs or their own understanding, There might be issues of over-pricing.
Fourthly, investors are too optimistic. Investors may be too optimistic about the future growth of ICO projects. In reality projects couldn’t sustain big growth in the long run.
Final point is the risk-control measures of the project. It is difficult for investors to control the project. After the launch of a project, usually there is a development roadmap to follow. How this project evolves is uncertain. Few ICO projects are able to list very clear future development plans. This means that investors are in a position to control.
These are the actual status and risks of ICO. Of course, we will not deny such funding method because of these deficiencies. Actually it presents much improvements to be made in shaping the ICO ecosystem. Professional institutions will emerge to make ICO more transparent and controllable.