What is an ICO?
Initial Coin Offering (ICO) is a crowdfunding approach used by startup crypto projects to raise capital through selling their own cryptocurrency (coin or token) to early investors. The startup offers its coin for public sale, and the public buys it, hoping that the coin value will appreciate it over time. By purchasing a specific cryptocurrency, investors expect:
- Profiting from selling tokens at a higher price in the future
- Redeeming tokens in exchange for offered products and services by the project.
The initial coin offering (ICO) is similar to the initial public offering (IPO) conducted by traditional companies to finance their startups. However, some differences exist. Unlike IPOs, ICOs are neither systematic nor regulated, with no investor protection mechanism or vetting process in place. The project developers can simply raise funds on their own platform bypassing tedious regulations and paperwork.
ICO investors also do not receive a share in the company and cannot influence internal management decisions. Nonetheless, crypto projects increasingly provide voting rights for their token holders and even allow participation in development.
History of ICOs
The first ICO was carried out by the Mastercoin project in 2013, raising $5 million, while in 2017, the EOS ICO raised a record of 4 billion dollars in total. ICOs reached a peak interest and hype in 2017 /2018. However, soon after, they lost their appeal and went to the periphery due to scammers swirling around them. In early 2019, the investment volume in crypto projects fell 58 times.
With the ICO model, crypto startups raised funds on their own platform. This is a cause for concern for investors as any project fraudulent or legitimate could sell tokens without regulatory oversight. Investors needed to research the project on their own before investing, and many did not bother to do so, falling victims to scammers. While they should trust no one in this new and unregulated environment, many blindly trusted the project and bought in.
To become a scammer, all you need is a website and a white paper full of technical jargon that no one reads or understands. Combined with good marketing, such as paying influencers to talk about your project, you set yourself to receive a massive pile of cash from naive investors.
Today, ICOs are a thing of the past, with many other alternatives available that lessen the risk of fraudulent crypto projects. For example, the Initial Exchange Offering (IEO) space exploded in popularity in early 2019, surfacing as an alternative to ICOs. IEOs initiated by centralized crypto exchanges and launched on their platform after passing a strict vetting process (at least in theory).
To learn more about the types of initial offerings in the crypto market, read: the difference between ICOs, IDOs, and IEOs.
ICO alternatives don’t guarantee scam-free projects. Investors should remain cautious as some fraudulent projects managed to launch their tokens on crypto exchanges, including Binance, one of the most trusted crypto exchanges in the crypto market. However, this model has decreased the number of scams in the space.
Investors are encouraged to conduct their own research and invest in projects with simple and easy-to-understand ideas that solve an existing problem. For more info, read: how to spot a crypto scam?
Rewards and risks of crypto initial offerings
Initial offerings in their previous form (ICO) and current form (IEOs and IDOs) provide a number of benefits for early and risk advert investors such as high and quick returns. ICO tokens can bring hundreds or even thousands of percentage returns in a short period of time. Also, participation is open to everyone and anyone but after meeting specific requirements and terms and conditions.
To find out how you can participate in initial offerings, read: crypto launchpad expalined.
In addition to the visible benefits, the initial offering of coins also carries significant risks such as running into scammers. the project founders receive the money and immediately dump their project. The investor also has no legal protection. All investments are made based on trust in the developers. Lastly, most crypto projects although not fraudulent is subject to failure just like any traditional startup business.