Initial Coin Offering, also known as ICO, is a kind of digital crowdfunding where cryptocurrency startups endeavour to raise money. As part of an ICO, crypto companies mint and sell their new digital tokens to early investors in exchange for other popular cryptos like Bitcoin – with the goal of fundraising.
In the crypto and blockchain world, budding entrepreneurs typically find it challenging to obtain funding because well-established companies seldom invest in ventures based on a mere white paper. Furthermore, the absence of standardized cryptocurrency regulations also dissuades many from entertaining the prospect of backing digital currency startups. ICOs stand out in this regard as they offer the most viable way to secure capital.
It can be said that ICOs serve as a dynamic solution creating a mutually beneficial relationship between investors and coin issuers. This two-way channel allows each party to reap unique advantages and rewards, making ICOs an exciting opportunity for all involved.
Although it’s true that ICOs have the potential to generate significant profits, it’s important to keep in mind that they also come with a range of associated risks. In the following article, we’ll delve into the mechanics of ICOs, discuss their brief history, and examine the risks that are involved along the way.
How does an Initial Coin Offering (ICO) work?
A company launching its ICO set the associated rules, pricing of tokens, and date beforehand to entice a greater number of investors and facilitate the fundraising process. This ensures that the eventual distribution of tokens is executed with maximum efficiency and ease.
When it comes to purchasing ICO tokens, users have to send funds to a designated address. In this particular field, the commonly preferred payment methods are Bitcoin and Ethereum, but occasionally fiat currency is also accepted.
To receive their purchased tokens, investors typically have the option of providing a new address for their crypto delivery, or they can simply sit back and let the tokens be automatically dispatched to the address from which payment originated.
It is important to note that the companies have multiple options for selling their ICO tokens. They can choose to fix both the number of tokens that will be released and their price or fix the price while leaving the total supply of tokens variable, or they can choose to fix the number of tokens while keeping the price flexible.
ICOs provide startups with an opportunity to not only secure funding but also build a community of motivated participants who have a vested interest in the success of the project so that the value of their tokens could appreciate.
If a token then surges in value over time, users can enjoy the profits by selling the coins on an exchange after they have been officially listed. Alternatively, buyers may choose to increase their investment by purchasing additional tokens once they become available on the market.
A brief history of ICOs
The first-ever ICO was launched in 2013 when a software engineer raised $600k for the MasterCoin token after publishing a whitepaper.
Next year in 2014, a cumulative sum of $30 million was raised through different crypto projects, with the highest amount being raised by Ethereum. Ethereum’s ICO is one of the earliest examples of successful fundraising of its kind that brought in a remarkable amount of over $15 million. This was achieved by selling fifty million ETH tokens at a price of just $0.311 per token. Fast forward to 2021, and ETH had touched an all-time high point of $4,382, representing a massive 1,408,903% ROI for early investors!
While ICOs started to gain pace in 2016, they reached an unprecedented pinnacle in 2017 when 342 ICO-based tokens were issued in a single year. The total funds raised amounted to a whopping $5.4 billion, propelling this ground-breaking concept to the forefront of blockchain innovation.
What are some common risks associated with ICOs?
Initial Coin Offerings remain largely unregulated worldwide and several countries have even banned them entirely. They fall under the category of high-risk products, considering the number of ICO scams that the blockchain world has witnessed over the years. For instance, Bitconnect stands out as the most notorious example of an Initial Coin Offering scam. Sadly, it wasn’t just any ordinary fraud, but a massive Ponzi scheme that left investors reeling with an astonishing loss of $3.45 billion.
With that said, evaluating the authenticity of an ICO project is a daunting task as there are myriad factors to consider before arriving at a conclusion. Unfortunately, in the event that an ICO turns out to be a fraudulent scheme, buyers are left without any protection, rendering it a highly questionable arena for investment. Furthermore, investing in ICOs provides no guarantee of a profitable return on investment, much like any other cryptocurrency investment. It is indisputable that the purchased coin may or may not experience a surge in value.
Therefore, if you are interested to partake in an ICO, it’s important to conduct thorough research and include the following aspects in your assessment process:
- It is advisable to conduct deep research on the team involved and evaluate their track record in the relevant field. Additionally, assess their online presence, including their social media profiles, followers, and level of engagement.
- Evaluate whether the project has undergone an audit, as this can serve as a positive indicator that the developers have taken security seriously.
- Carefully examine the venture’s whitepaper and assess its viability. Further, inspect the project’s website to identify any potential warning signs such as exaggerated assertions or typographical and grammatical errors which may suggest the involvement of fraudulent entities.
Also read: How To Create a Well-balanced Crypto Portfolio
Bottom line
Initial Coin Offerings have proven to be a game-changer for emerging crypto projects seeking funding in their early stages. And for eager investors, they present a lucrative opportunity to acquire the next big cryptocurrency in its early stages.
However, investing in ICOs demands a conscientious approach. The cryptocurrency space remains in its infancy, and thus, these investments entail high risk. In the unfortunate event that a project fails to deliver a viable product, there is little recourse available to safeguard investor interests.
