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 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 gather money in Bitcoins, Ethereum or other types of cryptocurrencies. It’s like another form of crowdfunding.
Benefits of ICOs
Like Bitcoin, the main benefit of ICOs is that startups do not have to deal with third-party authorities, such as banks and venture capitalists. The ICO provides a number of other conveniences namely:
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Get capital from anywhere in the world
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Potentially high returns for investors
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Quick and easy fundraising
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Limited supply-demand principle in which cryptocurrencies gain value in the future
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The tokens have a liquidity premium
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Little to zero transaction fees
The ICO started gaining popularity in 2017. A great example of 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 sale of ICO coins carried out at that time was worth $2.3 billion, which was more than 10 times its performance in 2016.
Risks and Dangers of ICOs
Like any new piece of technology, especially considering that millions of dollars are involved, there has been criticism and scrutiny from regulatory authorities. ICOs have involved risks, scams, and controversies that have 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 facing ICOs. Because they do not adhere to the laws and regulations of centralized authorities, the ICO faces a lot of speculation, debate and criticism surrounding its legality.
In the United States, the Securities and Exchange Commission (SEC) of the United States has not yet recognized tokens and ICO investments, which leaves uncertainty about the decision on their regulation. That is why it may be better to invest in startup ICOs that are related to legal companies.
Highh Potential for Scams
Another thing that ICOs are not regulated is that there is potential for fraud or scamming attacks. Those who make bets on ICOs are typically unsophisticated investors.
Investors don’t know if a project that hasn’t been released yet will ever be released. ICOs don’t even disclose personal information. So, for all they know, this is all a big money laundering scandal. On the other hand, there have also been cases of this happening with crowdfunding.
Higher Chances of Failure
A startup that receives its capital through ICO has a higher probability of failure. 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.
Conclusions
In the end, ICOs are fast and efficient crowdfunding opportunities, but with quite high risks in terms of security, regulation and high probability of failure. It works for some startups, but a large majority of them don’t. Whether it is something that is moral or not falls on how you consider the consequences and how good your marketing skills are.