The coins sold by small companies in Initial Coin Offerings are often compared to penny stocks. Like penny stocks, they're cheap. Penny stocks cost less than five bucks; a new coin released at an ICO can literally cost a penny or less. They also have the potential for huge returns. Monster Beverage, a drinks company, was selling at around 60 cents a share at the start of 2005. It's now worth nearly $60 a share. If you had bought $100 of those shares fourteen years ago, you'd now be sitting on nearly $10,000. That's not as high as the returns earned by early Bitcoin investors but it's still worth having. There are some important differences between penny stocks and cheap coins from ICOs though. Here are four of them:
An ICO Doesn't Give You a Company
Penny stocks might be cheap but they're still stocks. They give you a share of a company, possibly with voting rights. An ICO only releases a product whose value you hope will rise. It's like a new casino raising funds by selling its unique poker chips cheaply. If the casino is popular those chips could be worth a lot of money. But if the casino is never built, you'll be left with a pile of useless discs.
You Can Research the People Behind the ICO
One reason that a penny stock is such a high risk is that there's often very little information about the company or the people behind it. You might not know who the managers are, what they did before they launched the company or whether they're serious. You might know no more than the price of the stock and the name of the business. The rest is a shot in the dark.
Before launching an ICO, cryptocurrency firms release white papers. Those white papers will explain the background of the people launching the firm. You can often contact them on Telegram and ask them questions. That doesn't mean that you can find all the information you want, or always get the answers you need. There will always be gaps and risks. But ICOs can provide details about the people behind them.
You Can Research the Business Idea
The white paper should also explain what the company is doing and how it plans to do it. Again, that doesn't mean that the company will actually do what it says. It doesn't mean that the managers have the skill or the competence to do what they intend. But you should be able to assess their idea and decide for yourself whether or not you think it has legs. A bet on an ICO is a bet on a business idea.
Coins Are Easier to Buy and Sell than Penny Stocks
Penny stocks are usually bought and sold through brokers. The markets are illiquid, the commissions are high and the process isn't straightforward. The products of ICOs aren't always sold on major cryptocurrency exchanges but you can usually buy them directly from the companies and if the coin is a success, you can expect it to be listed in the future.
"Easier" isn't the same as "easy" though. Trading volumes will still be small. Not all coins will be listed on an exchange and those that are listed, often find themselves on small exchanges.
Like penny stocks, buying a small coin at an ICO is a high risk venture. But you can keep your losses low, and who knows, you might just strike it big!