Bitcoin revolutionized it by introducing the first decentralized digital currency where people and businesses control their transactions instead of banks and credit cards. Now we have another revolution in the form of the Initial Coin Offering (ICO).
What is an Initial Coin Offering (ICO)?
An ICO is a relatively new fundraising tool that startup companies can use to raise capital through cryptocurrencies/tokens. Here investors raise money in Bitcoins, Ethereum or other types of cryptocurrencies. It’s like another form of crowdfunding.
Advantages of ICO
Like Bitcoin, the main advantage of ICOs is that startups do not have to deal with third parties such as banks and venture capitalists. ICOs provide a number of other benefits, namely:
Raising capital from anywhere in the world
Potentially high returns to investors
Quick and easy fundraising
The principle of limited supply and demand where cryptocurrencies gain value in the future
Tokens have a liquidity premium
Low to zero transaction fees
ICOs started gaining popularity in 2017. A great example from May 2017 was the ICO for a new web browser known as Brave. This generated over $35 million in just under 30 seconds. In October of the same year, the total sales of ICO coins at that time was worth $2.3 billion, which is more than 10 times the performance of 2016.
Risks and dangers of ICOs
Like any new technology, especially with the millions of dollars at stake, there has been criticism and scrutiny from regulatory bodies. ICOs involved risks, scams and controversies that brought them under the scrutiny of professional companies and government officials.
Some common risks associated with ICOs include:
Lack of regulation
This is perhaps the biggest problem that ICOs face. Because they do not adhere to the laws and regulations of centralized authorities, ICOs face a lot of speculation, debate and criticism about their legality.
In the United States, the U.S. Securities and Exchange Commission (SEC) has yet to recognize ICO tokens and investments, which leaves uncertainty over its regulatory decisions. That’s why it might be better to invest in startup ICOs that are affiliated with legal firms.
Hygh Potential for fraud
Another thing with ICOs being unregulated is that there is potential for scams or scam attacks. Those who bet on ICOs are usually unsophisticated investors.
Investors don’t know if a project that hasn’t been announced will ever be announced. ICOs don’t even reveal any personal information. So as far as they know, this whole thing is one big money laundering scandal. On the other hand, there were also examples of this happening with crowdfunding.
More Chances of failure
A startup that gets its capital through an ICO has a higher chance of failing. In fact, a report conducted by a small team from Boston College in Massachusetts found that 55.4% of token projects fail in less than 4 months.
Ultimately, ICOs are fast and efficient crowdfunding opportunities, but with fairly high risks in terms of security, regulation, and high chances of failure. It works for some startups, but the vast majority of them fail. Whether it’s something that’s moral or not depends on how you consider the consequences and how good your marketing skills are.