What Drives The Price Of ICOs?
There are many things that determine the price of an ICO, but the most important has to be investor’s confidence in the idea to begin with.
The average amount that an Initial coin offering raises is around $11.5 million dollars, which is according to some recent analysis of over 750 ICOs. This then begs the question for where all of this value comes from? This is an important question that perplexes both investors and the founders of ICOs themselves. How do teams, often with no company and no product design end up making $11.5 million dollars out of thin air?
The answer is that what drives the value of ICOs is what’s called perceived value.
What ICO Investors Should Consider Before Investing
There are more than a handful of ranking factors that should go into how people evaluate the efficacy of an initial coin offering, which includes the following:
- Company Founders: People should for strong professional credentials and a proven track record for delivering results.
- Market Need: They should make sure that the business plan is realistic, and that the ICO solves a legitimate problem with a workable solution.
- Opportunity for Growth: The growth of the ICO comes down to working with large and profitable projects.
- Token mechanics: The token should be a requirement for the solution to work, and not just an excuse for raising capital.
- Adoption Strategy: Ultimately, the blockchain is about people and the founders behind the project. Ask yourself if it would be realistic that people will actually make use of the solution.
How Investors Really Evaluate ICOs
- Branding: If the company’s founders come from international organisations such as Uber or Google, then many investors might be tempted to overlook other aspects of the ICO, including if it is a feasible project or not.
- Fancy Titles: The founding team members who come from a background in finance or banking are usually given preference over other fields.
- Quality of website and imagery: It could be said that investors place too much importance on the website for the ICO, which includes the founding team’s profile photos or a demonstration video.
- Public Relations: Investors are often swayed by PR firms, especially when it is mentioned in big name publications such as Forbes or other media outlets.
We Go For The Familiar
Once we determine that the an ICO’s founder is from an ivy league business school, or that one of the advisors sits on an original blockchain team such as Ethereum, we tend to overestimate the success of the project, as we place greater confidence in those big names, and that confidence transfers to the ICO project.
One Nobel Prize-winning author Daniel Khaneman with his book Thinking Fast and Slow outlines that the brain has a particular bias towards people who we deem famous or attractive, or in an otherwise already attractive light. For example, if we like Apple products, then it’s natural that we’d assume that anyone who works for the company is intelligent and successful.
The Invisible Hand And Fuel
The economist Adam Smith described an “Invisible Hand” that appears to control the market. For example, he famously proposed that the rich gain more wealth so that they can satisfy their vanity and insatiable desires.
But to fulfil those desires, they need to employ the poor by the thousands to run their businesses and to captain their yachts.
In doing so the rich can redistribute the wealth in a way that was previously unintended; to benefit people other than themselves. This means that the invisible hand was at work to distribute wealth for the betterment of everyone.
If we expand on Smith’s idea with the idea that investor’s confidence could be a form of invisible fuel, as most ICOs are spurred by nothing but speculation. It’s this confidence in the ICOs that let projects like Filecoin raise more than $200 million dollars, and it’s precisely the lack of investor confidence for the reason that many ICOs fail.
In other words, value starts and exists solely in our minds, according to out biases.