What is an ICO?
ICO stands for Initial Coin Offering. It is a way to raise capital for many sorts of blockchain-related projects by selling cryptocurrency. New projects use it to sell freshly minted crypto tokens in exchange for Bitcoin, Ether, other cryptocurrencies, and, also at times, fiat. In many ways, it closely resembles an Initial Public Offering (IPO), the one big exception is that ICO’s are generally unregulated and grant little to zero rights to their investors.
So why a potential investor or anyone for that matter buy or launch an ICO? There are several ways how ICO’s can be beneficial for their stakeholders.
Benefits of buying into an ICO
investors can realise some of the following benefits:
- A way to obtain a new cryptocurrency for a low cost in hopes to get good returns on their investment (ROI) much like buying Bitcoin in the early years..
- ICO tokens/coins may come with some additional benefits, such as revenue redistribution or access to projects products and services before they are released to the wider public
- Being able to support projects and teams that you like.
Whereas token issuers get:
- Quick access to seed funding with fewer regulatory restrictions. (Although there are some, but it can depend heavily on the country that you are in)
- Opportunity to create and experiment with innovative decentralized business models.
- An initial user-base which is invested emotionally to test the service.
What are the risks?
Like any investments and new technologies, ICO’s come with their share of risk. For instance, token buyers have to face:
- Inexperienced teams with no guarantees that the project will fulfill its goals
- No regulatory protection and guarantee of returns.
- Limited transparency on project development and progress.
- The risk of the project being an elaborate scam
ICO initiators also take risks due to:-
- Uncertain regulations on a global scale that may result in being non-compliant as well as potential fines .
- An unstable investment which comes from the volatility of cryptocurrencies.
- Limited information about who holds the tokens.
How does an ICO work?
A project or a company states its objective to hold an ICO by publishing a so-called whitepaper. It details the project, goals, how much capital it will need to raise and when the ICO is set to be released, and also the executive management team
In exchange for making an investment into the ICO, an investor gets the project’s cryptocurrency, usually referred to as a token. Depending on the project, tokens can be acquired in exchange for other cryptocurrencies or fiat money.
The majority of ICOs are issued on dapp platforms. To date, the most popular token issuance platform is Ethereum.
ICOs allow startups and companies to raise capital much easier than, for instance, by selling shares or bonds. The market is still very much unregulated, and they don’t need to deal with venture capitalists or banks. Going forward, however, raising capital via an ICO can be expected to become more and more complicated as the market is maturing and new regulations are introduced in different countries around the world.
When was the first ICO?
Since 2014, the ICO market had steadily grown, but it wasn’t until 2017-18 where we saw an explosion. During this time we saw 875 ICOs in 2017 alone, almost 30 times more than 2016. They helped raise over $6.2 billion, compared with $96 million in 2016. But the record year for ICO’s was 2018 with more than 1200 ICOs which resulted in $7.85 billion raised!
The largest amount raised for an ICO to date was the EOS ICO which raised over $4billion throughout 2017-18. Since this time interest has waned in this sector of the industry
Are ICOs legal in 2020?
At the moment there is no definitive answer. There isn’t a clear regulatory framework regarding ICO’s yet, so it is a very grey area. Going forward it is very likely to be regulated; which means that ICO’s will be required to comply with KYC/AML rules. Right now, it is difficult to force any restrictions, since most countries & governments are hesitant to put restrictions on a possible game changing technology.
However the SEC (United States Securities and Exchanges Commission) does treat ICO’s differently. If the token being sold is a utility token, it doesn’t classify it as financial security. But, if the token has qualities of an equity with a sole purpose to appreciate in value and benefit investors, then it can be treated as a security and therefore must comply with the current legal processes.
Until a regulatory framework is imposed, it is expected that people will continue to use ICO’s as a tool for raising capital.
How to tell if an ICO is a scam
Over the years sadly there have been many exit scam ICO’s and rightly so this has scared off many potential investors and even ICO initiators. So what could be the common areas that as an investor you need to scrutinise to know if a ICO is legitimate or not?
- Anonymous team. Most scams do not publicize their team, so no one can verify who is related to the project. It is a major red flag. Legitimate ones will and even link to their LinkedIn profiles.
- Does it seem too good to be true? If the project offers crazy returns or impossible products, that’s a major red flag.
- No roadmap? A startup will plan ahead and inform its investors, users etc of progress. If the future of the project is concealed, it’s likely that it doesn't exist.
- Bitcointalk.org/Reddit thread - Many genuine ICOs launch their offering by announcing it on BitcoinTalk.org and/or Reddit. They are the largest forums for Bitcoin and cryptocurrencies in general, legitimate projects will participate in the discussions and answer all the questions that users will ask them
- Where is the code? Genuine projects will commit their code to Github where anyone can review it. No code, no project = scam
- Is the token or blockchain necessary for it to exist? Many projects can function just as well without a distributed ledger. Many projects try to take advantage of ICO’s just to collect extra money and jump on the ‘bandwagon’. You need to be objective and ask yourself “Does it really need its own coin?”
- Marketing - ‘Real’ projects hire qualified marketing specialists or marketing agencies to create an active, engaged community and brand. If the ICO you are looking at doesn’t have any of this and it's just spamming people on social media & telegram then it could well be a scam