An ICO (Initial Coin Offering) is a type of capital-raising activity in the cryptocurrency industry. One of the main benefits of an ICO is that the often bypass many bureaucratic processes that companies must go through when securing funding through traditional means. This is because they eliminate the need for intermediaries as they create direct connections between the company and investors.
As a result, both parties involved (the company and investors) have a mutual interest in the prospective value of the tokens, which is why the issuing company typically put strategies in place to generate some sort of value in their tokens. It’s wise to note that, unlike stocks, tokens don’t usually grant you an equity stake in a company. Instead, the majority of the tokens that are offered through ICOs provide their owners with a share in a company-created product or service.”
What is an ICO
In many ways, an ICO is the cryptocurrency industry’s equivalent to the IPO (initial public offering). Although, one significant caveat is that ICOs are subject to far less regulation, and as a result, they are a considerably riskier investment than a traditional IPO.
When a crypto start-up or company intends to raise money through an ICO, the process will typically look something like this:
- The company will outline their investment targets, why they need the funds and usually provides a whitepaper that summarizes the key aspects of the project
- Next, the company will create the tokens. These tokens are usually fungible and tradeable and are created using specified blockchain platforms. At this point, it’s crucial to discern how many tokens will be created and how many of them will be kept by the founders.
- The company will then promote the ICO and market it to the relevant audience to attract potential investors.
- The coins are then offered to investors (usually in several stages and varying price points. In general, the earlier you invest, the lower the token price).
- The company can then use the proceeds from the ICO to launch a new product or service. The investors will then expect to use the acquired tokens to benefit from the product/service or wait for the appreciation of the tokens’ value and eventual launch on an exchange where they can be traded.
A quick warning on ICOs
The overall appeal of ICOs is so that investors can get on board potentially successful projects from ground zero, holding large amounts of tokens in the company for a rock bottom price.
However, through my own experience, ICOs are precarious investments even under the best of circumstances. Plus, they have a high potential for being scams. I have personally invested in several ICOs that seemed to tick every box and looked like an excellent investment at the time; however, they unfortunately turned out to be scams where I ended up losing all of my money. (This happened more than once).
According to CoinTelegraph, when analyzing the data of the funds raised for 1,014 ICOs, a staggering 576 of them turned out to be scams. That’s 57%! The cumulative losses for all of these scam ICOs totaled over $10.12 billion, with the largest scam racking up losses of around $735 million via the now-infamous “Petro-scam.”
Now, that’s not to say that you shouldn’t ever invest in an ICO. On the other side of that argument, I have also done extraordinarily well through ICOs, even earning over 200x at one point. With that said, just make sure you go into the process with your eyes wide open. In these situations, it doesn’t hurt to be overly skeptical.
If possible, ask for evidence of the claims they make, and make sure you evaluate the whitepaper and the roadmap thoroughly. Get involved with the community and get a feel for the project before you invest any of your hard earned cash; and as always, pay no attention to the “moon boys” trying to hype up the project and spread FOMO.
The more information you have about the project, the better; and the more chance you have of uncovering a gem in the rough that could earn you a great return on your investment.