Bitcoin created a revolution by introducing the first decentralized digital currency in which people and businesses control their transactions instead of banks and credit cards. Now, we have another revolution in the form of initial currency supply (ICO).
What is an initial coin offer (ICO)?
An ICO is a relatively new fundraising tool that start-ups can use to raise capital through cryptocurrencies. Here, investors raise money in bitcoins, Ethereum or other types of cryptocurrencies. It’s like another form of crowdfunding.
Advantages of ICOs
Like Bitcoin, the main advantage of ICOs is that companies do not have to deal with third-party authorities, such as banks and venture capitalists. The ICOs offer a number of other amenities, namely:
Raise capital from anywhere in the world
Potentially high returns for investors
Easy and fast fundraising
Limited demand-supply principle in which cryptocurrencies gain value in the future
The tokens have a liquidity premium
Small to zero transaction fees
ICOs began to gain popularity in 2017. A good 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, total ICO coin sales at the time were worth $ 2.3 billion, more than ten times the yield in 2016.
Risks and dangers of ICOs
Like any new technology, especially if millions of dollars are taken into account, there has been criticism and scrutiny by regulators. ICOs have involved risks, scams and controversies that have led them to scrutinize professional companies and government officials.
Some common risks associated with ICOs are:
Lack of regulation
This is perhaps the biggest problem ICOs face. Because they do not adhere to the laws and regulations of centralized authorities, ICOs face much speculation, debate, and criticism about their legality.
In the United States, the U.S. Securities and Exchange Commission (SEC) has not yet recognized ICO filings and investments, leaving uncertainty about the decision on its regulation. That is why it may be better to invest in startup ICOs that are linked to legal firms.
High Potential for scams
Another thing in which ICOs are not regulated is that there are possible attacks of fraud or scam. Those who bet on ICOs are usually unsophisticated investors.
Investors do not know if a project that has not yet been published will ever be published. ICOs do not even disclose any personal information. So, as far as they know, this is all a big money laundering scandal. On the other hand, there have also been cases of this with crowdfunding.
Higher Probabilities of failure
A startup that obtains its capital through ICO is more likely to fail. In fact, a report by a small team at Boston College in Massachusetts found that 55.4% of listing projects failed in less than 4 months.
In the end, ICOs are fast and efficient crowdfunding opportunities, but with quite significant risks in terms of security, regulation and high chances of failure. It works for some startups, but the vast majority fail. Whether or not you are moral depends on how you view the consequences and how good your marketing skills are.