Initial coin offering
An ICO-Initial Coin Offering- is a method of funding that start-ups use to obtain funds necessary for them to initiate or complete blockchain-based or cryptocurrency project.
It usually involves the project team allocating a certain amount of digital tokens to investors and backers in exchange for money. The money can be in forms of fiat currency like dollars and euros, or in most cases, in the form of another cryptocurrency like Bitcoin or Ethereum.
Why makes ICOs good for cryptocurrency?
Initial coin offerings offer the easiest way in which companies and cryptocurrency startups raise money. These token sales help fast-track development of projects that would otherwise take more time to initiate.
But maybe more interestingly, it is a unique chance for investors to put money into a project early. Such an opportunity accords them the benefit of reaping huge returns should project succeed.
The structure of most ICOs (as the landscape remains highly unregulated) means that they do not fall within the scope of government regulation. As such, though advantageous to the start-up company looking to raise funds, coin offerings can be risky to the public.
Why do ICOs find it so easy to raise funds?
The main reason can be attributed to the phenomenon often referred to as FOMO-fear of missing out. In the beginning, cryptocurrency didn’t get much attention. Bitcoin, the first cryptocurrency, was often ignored and thought of as a currency for the darknet.
Then the first wave of Initial coin offerings came, and investors made huge returns when the tokens began to trade. The hype created reached fever pitch in late 2017, when cryptocurrency and token value grew exponentially, turning some token holders into instant millionaires.
It is true that some ICOs were run so well, people made money from them. Read about the best ones here.
Why are initial coin offerings risky?
More often than not, authorities have cautioned the public against investing in coin offerings, terming such investments risky. To that end, some countries have banned ICOs while others are looking into getting the system regulated.
Why then, are ICOs risky? Consider the following as possible reasons you should think twice before committing your funds to a token sale.
Loss of ICO tokens
The biggest risk is that you can lose all your investment. If you invest in an ICO that turns out to have been non-existent, then you have no way of claiming your money back. But maybe the worst would be when your wallet- where you store your ICO token- is compromised by a cyber-attacker.
Hackers prowl the web, looking for holes around crypto security systems. They can use phishing attacks to access your wallet and steal all your coins.
It is also possible that you could just lose your private key. Without this key, you cannot access your tokens. They’d be as good as lost. Hackers exploit market hype, irreversibility of transactions done on the blockchain, and loopholes in the code to access and steal tokens.
That’s a big risk, one you won’t suffer from, for instance, if you lost your IPO shares certificate.
The ICOs could be a fraudulent Ponzi scheme
The risk you expose yourself to when supporting an ICO may not be so apparent. The main factor that hinders the public from realizing they are being conned has to do with the hype and promise accompanying shady projects.
Cryptocurrency and blockchain technology is still highly unregulated, anonymous and borderless.
Some fraudsters take advantage of that fact, to collect funds from the public before eventually disappearing with millions of dollars. Tokens never get listed or you simply never hear of the team after the token sale.
For example, the REcoin Group was accused by the US SEC of defrauding investors by way of providing false ICO information.
Another example is the OneCoin ICO that defrauded the public over $350 million before authorities caught up with the culprits.
Unlike IPOs, coin offerings are usually catnip for scammers and fraudsters. And the main reason revolves around what we have said before: they are yet to be properly regulated, and operate in an ecosystem that provides very few or no checks and balances.
ICO valuations are often nothing but speculation
ICOs are announced and undertaken out of an idea that could work on the blockchain or related platform. So, when you back the token sale, you are investing your money in an idea.
Most of the projects do not have any real-world use at the moment of asking for funds. You will find that they do not have customers or a source of revenue.
So, they offer the token to the public and base its valuation out of pure speculation. What you may find is a whitepaper that most investors don’t understand or a website that promises quick returns.
Another related issue concerns the apparent manipulation that affects token prices. Some “pump and dump” scheme may plunge a token’s value leading to loses.
Lack of transparency
Some Initial coin offerings operate in a way that there is no transparency in their operations. When investors need information, it is either not provided or its insufficient and unhelpful.
So, as an investor you fail to understand your rights, do not know how the funds are being utilized, and generally has no say in the company. The token value can, therefore, be manipulated as we mentioned earlier to exploit the investor.
It also becomes difficult for investors to tell whether the company or group behind the ICO is genuine or otherwise.
The lack of transparency may also mean an investor wouldn’t know if they are buying tokens in a project whose funds could help criminal efforts. Apart from posing a risk to the investor, it also may go against Anti-Money Laundering (AML) regulations.
Genuine ICOs can be great investment vehicles. However, there’s always a risk of falling prey to fraud and losing everything. The best thing one can do is to find out as much as possible before committing funds to buying ICO tokens.