An ICO, or Initial Coin Offering, is a novel approach to generating funds for various initiatives by releasing a cryptocurrency. Technology entrepreneurs mostly use it. In 2017, the world saw 235 ICOs, which were five times higher than in 2016. They help raise more than $6.2 billion, compared to $96 million in 2016. Nonetheless, 2018 was a milestone year for ICOs, with over 1200 ICOs raising over $7.85 billion.
If you want to learn about ICOs and are seeking an ICO, you’ve come to the perfect spot. This article will explain what an ICO is, how it works, and the dangers and rewards it brings.
What Exactly is an ICO?
ICO is an abbreviation for “Initial Coin Offering.” It is a new method of raising funds for various blockchain-related businesses by selling bitcoin. Future initiatives will use it to sell freshly generated crypto tokens in return for Bitcoin, Ether, other coins, and, occasionally, cash. It is like IPOs in some ways, except that ICOs are usually deregulated and provide participants with little to no protection.
So, why would someone invest in or establish an ICO? There are various ways in which ICOs might benefit their investors.
The Benefits of ICO
The following advantages are available to investors:
- A chance to purchase fresh bitcoin at a low cost in the expectation of making a big return on their investment (sort of like buying Bitcoin in 2011).
- ICO coins may have extra perks, like revenue redistribution or exclusive access to project items and services.
- Capability to assist initiatives and teams that you like working with.
Meanwhile, token issuers will receive:
- Rapid access to seed money with fewer regulatory constraints.
- Unless so noted, funds have no equity reduction.
- Opportunity to develop and test novel decentralized business practices.
- An early user base is ready to put the service to the test.
Needless to say, ICOs have their own set of hazards. Token purchasers, for example, must contend with:
- Untrained staff with no certainty that the program would deliver on its commitments.
- There is no legal support or assurance of returns.
- There is a lack of openness in the creation and execution of the project.
- The possibility of the operation being a sophisticated fraud or a pump and dump plan.
At the time of writing, ICO promoters are taking a risk because of:
- Vague rules might lead to fines or prison terms.
- A risky bet because of the unpredictability of cryptocurrency.
- There is next to no info available regarding the crypto holders.
Next, let’s look at how ICO works.
How does an ICO function?
A project or corporation declares its desire to organize an ICO by releasing a whitepaper. It describes the project, its aims, how many funds it needs to earn when the ICO will take place, and other details to assist buyers in choosing whether to join.
An investor receives the project’s cryptocurrency, also known as a token, in return for investing. They may get tokens in return for other coins or fiat currency such as USD, GBP, and so on, according to the project.
Publishers distribute most ICO tokens on Dapp’s networks. As of February 2019, Ethereum is the most common token issuing system.
ICOs make it far easier for startup companies and other businesses to get funds than, say, issuing stocks or bonds or getting credit. They don’t have to deal with private investors or institutions because the industry is still mainly unsupervised. However, as the industry grows, the government will put new laws in place. This will make raising cash through an ICO to be highly difficult.
Is ICO legal?
The answer is, maybe. There is no proper legal structure in place for ICOs yet. Therefore, it is a completely murky area. Because investors expect them to be licensed in the future, most ICOs must adhere to KYC standards. As of now, imposing any constraints is too tough since most cops are unwilling to prohibit a potentially game-changing technology.
The Securities and Exchange Commission of the USA views ICOs differently. If the cryptocurrency being offered is only a utility token, it is not financial security. But, if the cryptocurrency possesses the characteristics of an equity coin with the sole aim of increasing in worth and benefiting its shareholders, SEC will recognize it as security and must adhere to the SEC rules.
How to Identify a Scam ICO
Exit scam ICOs are becoming increasingly popular and knowing how to spot them might save you a lot of money. According to Ernst & Young, over 10% of the money collected by ICOs winds up in the hands of fraudsters.
However, there are methods for detecting bogus ICOs. Look for the following frequent signs:
- Many fraudsters do not disclose their team, making it impossible to determine who is involved in the project. It’s a huge red flag.
- A deal appears to be too good to be true. If the project promises you unbelievable returns or unfeasible items, this is a significant red flag.
- A genuine startup always plans for time and is forthcoming about its next moves. If the project’s future is unknown, it is most likely non-existent.
- An ICO may be legitimately launched by advertising it on BitcoinTalk.org. It is the largest Bitcoin and cryptocurrency forum, and respectable projects will happily join in conversations and answer any queries.
- Credible projects will upload their code to GitHub, where users can review it. Without code, there is no project.
- Many projects can work properly without the use of a distributed ledger. Many projects attempt to take advantage of ICOs to raise funds. So, consider whether it truly needs the coin.
- Trustworthy projects recruit competent marketing professionals who can foster an enthusiastic, engaged audience. It is also a good indicator if the initiative receives positive coverage in reputable media.
Remember that not all ICOs are frauds and that they may also be a legitimate means to generate funding for legitimate and innovative initiatives.