ICO (Intitial Coin Offering) stands for Digital Initial Coin Offering. It is a new way to raise capital for all kinds of blockchain related projects by selling cryptocurrency. New projects are used to sell newly minted crypto tokens for Bitcoin, Ethereum, other cryptocurrencies and sometimes fiat. In a way, it is similar to Initial Public Offerings, but it can also happen that ICOs are mostly fake or give little or no rights to their investors.
So why would someone buy or launch an ICO? There are several ways ICOs can be beneficial for their stakeholders.
ICO (Intitial Coin Offering) Benefits:
Investors can enjoy the following benefits:
- Opportunity to acquire new cryptocurrency at a low cost (like buying Bitcoin in 2011) in hopes of getting a good return on their investment.
- ICO coins can provide additional benefits such as revenue redistribution or privileged access to project products and services.
- Ability to support projects and teams you like.
Meanwhile, ICO distributers get:
- Quick access to seed financing with fewer legal restrictions.
- Funds with no loss of equity unless otherwise stated.
- Opportunity to create and experiment with innovative decentralized business models.
- Initial user base willing to test the service.
So what are the ICO Risks?
Needless to say, ICOs also come with a fair share of risk. For example, token buyers have to face:
- Relatively inexperienced team with no guarantees that the project will deliver on its promises.
- There is no legal protection and no money back guarantee.
- Limited transparency in project development and progress.
- The risk that the project is an elaborate hoax or pumping and dumping scheme.
ICO initiators take risks for:
- Unclear regulations that could result in fines or penalties.
- An unstable investment caused by the volatility of cryptocurrencies.
- There is very little information about token holders.
At the end of the article, you can find a list of signs that may indicate that the ICO project is a scam.
Now, let’s take a quick look at how ICOs occur.
A Brief History of ICOs
The history of the ICO began in 2013 when it was made by Mastercoin, a digital currency and communication protocol. It raised about $5 million. It was soon followed by the Ethereum ICO, which managed to raise around $18 million at the time.
Since 2014, the ICO market has been growing steadily but did not see a boom until 2017-2018. It saw 875 ICOs in 2017 alone, almost 30 times more than the $96 million in 2016. They helped raise over $6.2 billion compared to $96 million in 2016. Still, the record year for ICOs was 2018 with over 1200 ICOs, raising $7.85 billion.
The largest ICO to date is EOS, a decentralized app network that has raised over $4 billion in several rounds in 2017 and 2018. Since the ICO boom in 2017 and 2018, interest in ICOs has started to wane. How does an ICO work?
A project or a company supposedly states its intention to hold an ICO by publishing a whitepaper. It describes the project, its goals, how much capital should be raised when the ICO is planned, and other information that will help investors decide whether to participate.
In exchange for making an investment, an investor receives the project’s cryptocurrency, often referred to as a token. Depending on the project, tokens, other cryptocurrencies or US dollars, euros etc. It can be purchased for fiat currencies.
ICOs allow startups and other companies to raise capital much more easily, for example, by selling shares or bonds or taking out loans. The market is still largely unregulated and they don’t have to deal with venture capitalists or banks. Going forward, however, raising capital through an ICO can be expected to become more complex as the market matures and new regulations are introduced.
Are ICOs Legal?
The answer maybe. There is no clear regulatory framework regarding ICOs yet, so it is a completely gray area. It is likely to be issued in the future; Therefore, most ICOs are required to follow KYC/AML rules. As of now, it is very difficult to set any limits as most officials are hesitant to impose restrictions on a potentially world-changing technology.
The United States Securities and Exchange Commission (SEC) treats ICOs differently. If the token sold is only a service token, it is not classified as a financial security. However, if the token has the qualities of a stock coin for the sole purpose of appreciating its value and benefiting its investors, then it can be considered collateral and must comply with legal processes.
At the end of the day, until a regulatory framework is imposed, most people will continue to use ICOs as a fundraiser.
How to Identify a Scam ICO?
Exit scam ICOs are quite popular, so the ability to identify them can save you a lot of money.
According to Ernst & Young, almost 10% of all funds raised by ICOs go to scammers’ wallets.
However, there are ways to identify the fraudulent ICO. Check out these common signals:
- Anonymous team. Most scams do not promote their teams, so no one can verify who is involved with the project. This is a big red flag.
- An offer seems too good to be true. If the project is offering you ridiculous returns or impossible products, that’s a huge red flag.
- There is no roadmap. A serious startup always plans ahead and is clear about next steps. If the future of the project is secret, it probably doesn’t exist.
- Bitcointalk.org thread. A legit way to launch an ICO is to announce it on BitcoinTalk.org. It is the largest forum for bitcoin and cryptocurrencies and legitimate projects, gladly participate in discussions and answer any questions.
- Code. Trusted projects will submit their code to Github where anyone can review it. No code, no projects.
- Is token or blockchain required? Many projects can do well without a distributed ledger. Many projects try to leverage ICOs just to raise some extra money. So ask yourself, does he really need his own coin?
- Public relations and media activity. Trusted projects recruit qualified marketing professionals who have managed to build an active and engaged community. Also, it’s always a good sign that the project is getting positive reviews in quality publications.
Keep in mind that not all ICOs are scams and they provide a legit way to raise money for legit and cool projects.