This post intends to explain what is dilution and why you should care about it. I write it because I think that many people are just throwing their hard earned money away on certain ICOs and that makes scammers come in mass to the crypto space.
Dilution is the effect of distributing your money (or ether or whatever you invest with) across all the tokens issued. With an example:
a) ICO IAreGood will issue 100 tokens. 40 of them will be sold and 60 kept. Each token will cost 1 dollar.
We will end up with 100 tokens of market cap backed up by 40 dollars of investment. The objective fundamental value of the token would be 40/100 -> 40 cents.
b) ICO MeUrBad will issue 100 tokens. 10 of them will be sold and 90 kept. Each token will cost 1 dollar.
We will end up with 100 tokens of market cap backed up by 10 dollars of investment. The objective fundamental value of the token would be 10/100 -> 10 cents.
What does this mean for you: If you invest in (A) you are paying a extra of 60 cents per token. If you invest in (B) you are paying 90 cents extra per token.
This is a fundamental valuation, this is independent of how good the project or team. Your valuation may be much higher because the project is great, etc... Mabe MeUrBad could even be a good investment if they have, I don't know, Elon Musk in the team.
When does dilution affect your earnings? The moment the company starts selling their tokens to finance their operations. More offer, less price for you.
IN PRACTICAL TERMS
AVOID PROJECTS THAT DON'T BURN REMAINING TOKENS
- Unsold tokens must always be burned. Alternatively, they would have to be airdropped to investors pro-rata (proportionally to the investment they have made). If not, dilution increases further and you will not know by how much until the ICO is finished.
If not, the ICO team are keeping the tokens and that increases the dilution of your investment.
CONSIDER VERY CAREFULLY PROJECTS THAT SELL A LITTLE PERCENTAGE OF THE TOKENS
- The dilution is enormously increased if they only sell 10% or 20% of the tokens. The project would need to be extremely good to give you profit.
Please, let me know your views and how to improve this explanation.
Topic: WISE UP! - Dilution and what it means for you in ICOs (Read 63 times)
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