Initial Coin Offering (ICO)
ICOs at a very basic level are usually startup technology companies (or projects) that have their own blockchain and are looking for funding from the general public. Sometimes they are existing companies wanting to raise funds for a new side project or they could be complete unknowns in the cryptocurrency world.
Users (or “supporters”) of the ICO are asked usually to donate Bitcoin or Ethereum to a unique wallet address, in return they are given some of the newly minted coins from the new blockchain. These coins can be used for multiple things, perhaps as a token for a service, such as gaming or traded on exchanges, used in payment systems or perhaps just kept as an investment.
Generally, purchasing “tokens” (the name given to coins before they are produced on the project’s blockchain) does not mean you own any part of a company, rather just part of their blockchain.
The first ICO to be held was by Mastercoin in July 2013. By the end of 2017, ICOs had raised almost 40 times as much as in 2016 ($230 million USD) – but this still equated to less than 2% of traditional investment methods for startups. By August 2017 more than 400 ICOs had been conducted.
Why are ICOs good?
ICOs are good because they allow anyone (dependant on your country deeming them legal or not) to get involved with funding a new startup and more often than not have an active contribution to a project from start until launch.
As anyone can setup a website, cryptocurrency payment system and blockchain it also means the barrier to entry for projects wishing to receive donations is very small. In most countries, ICOs are not regulated and therefore an idea born on a Friday, can be live and accepting crowdfunding by Monday!
Additionally, ICOs have had some positive response from the crypto-community because it allows very small investors to be involved in growing projects and also directly benefit from them too. The alternative model are IPOs (Initial Public Offerings) which require investors to be registered in the country they are based in and have large amounts of funds to participate – these are more common with your Dotcom tech startups.
The investment in some ICOs can be as little as $50 USD and the returns can be astounding (Worldcoin 6,792%, FastCoin 13,595%, InfluxCoin 59,577% and an eye-watering 823,750% with DubaiCoin)
Why are ICOs bad?
As with all good things tech, there is always a bad side. Criminals have seen how lucrative ICOs are and numerous scam ICOs have been setup. Users have deposited funds hoping to be involved in the exciting project only to find when the tokens have sold out that the website and all traces of the project disappears from the internet – along with their donated Bitcoin or Ethereum.
Many risky ICOs have very poorly written, non-functioning (apart from the deposit area!) websites and anonymous teams and addresses behind them. This makes your investment extremely risky with odds the same as red or black on roulette as to whether they’ll launch. You may not ever see your investment again. Also, plenty of ICOs are failed startups that angel investors would not touch for one reason or another (product already exists or could be copied easily for example) – due diligence is the key when looking for the bad ICOs – do as much research as you can – every tiny detail is important – as there are so many ICOS, you can always pass on one you don’t feel comfortable about and choose another.
As more ICOs appear on the scene, so do the fake or scam ones – some governments are stepping in and warning their citizens of the risks involved in investing in unregulated projects (especially with cryptocurrencies being unregulated – there is no comeback on lost funds). To date, only 13 countries have voiced their opinion on ICOs, some more favourably than others.
Past famous ICOs include Ethereum, which raised $2.3 million USD (at the time) from 3,700 BTC in July 2014.
The mammoth $232 million dollar Tezos ICO ended in failure in July 2017 after the founders had an internal power-struggle – allegations of fraud and misrepresentation followed and three ongoing class-action lawsuits have been brought against them. Still, the ICO hasn’t completed or launched anything.
Lending platforms, such as BitconnectX, Davor, Thorncoin and MonyX have all had record sell-out ICOs – these are the riskiest of ICOs, with websites having no team or company details and being registered anonymously – yet millions of dollars pour into them as users try to get rich from their lending products.
Additional notable ICOs also include the messaging app Kik which raised $100 million in September 2017 and just in January 2018, even Kodak announced they would be conducting an ICO.
In this brief article, we covered what an ICO is. Look out for more in-depth articles covering how to find a good ICO, how to get involved with an ICO and a walk-through guide to participating in one.
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