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There are a lot of people who have decided to get involved with an ICO over the last few months. Many of them are completely new to investing, but the buzz around crypto assets has become so powerful, and its highs so alluring, that people who would never consider investing in an untested project are throwing everything from a few hundred to thousands of dollars, euros and pounds at them.
However, it is clear that quite a significant number of people are getting involved because a close friend encouraged them to over a few drinks in a bar, indicating yet again that ‘word of mouth’ is one of the most powerful sales tools available. This is not to say that people are being duped by others; the sharing of information is a genuine wish to help friends improve their financial situation. However, what are you really buying when you participate in a token sale?
To start with, you are not buying stocks. As Dennis H. Lewis writes in ICO Success blog “you are buying an idea in the form of a digital asset.” He means that tokens are an “abstract economy.” They are affected by the usual market forces of supply and demand and inflation, but what buyers really need to understand is this: how can I use these tokens?
If you are considering investing in a token sale, here are two questions to ask before you dive in:
Why will people want this token in the future?
One of the objectives of buying tokens is that they will increase in value, and so make you money from your investment. Therefore, you should research how the token can be used, often referred to as its ‘utility’ as the first step in your research.
How is the token being created?
Some tokens are created as a one-time event, whilst some may have an ongoing creation process. Will the method used create more or less scarcity for the token, because scarcity has a positive effect on the token value. If a limited number of tokens is issued, and the token is in demand, then the value rises for the initial token holders.
Basically, make sure you understand the value proposition of any token you’re planning on investing in — cryptocurrency is exciting and its benefits have been shown to be tangible, but that doesn’t mean you should throw all caution to the wind.