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 the Initial Coin Offering (ICO).
What is an Initial Coin Offering (ICO)?
An ICO is a relatively new fundraising tool that startups can use to raise capital through cryptocurrencies / tokens. Here, investors raise money in Bitcoins, Ethereum, or other types of cryptocurrencies. It is like another form of crowdfunding.
Benefits of ICOs
Like Bitcoin, the main benefit of ICOs is that startups don’t have to deal with third-party authorities such as banks and venture capitalists. ICOs provide a number of other amenities, namely:
- Raising capital from anywhere in the world
- Potentially high returns for investors
- Quick and easy fundraising
- Limited supply-demand principle in which cryptocurrencies gain value in the future
- Tokens have premium liquidity
- Little or no transaction fees
ICOs started to gain 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, total ICO coin sales made at that time were 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 it’s millions of dollars, there has been criticism and scrutiny from regulatory authorities. ICOs have involved risks, scams, and controversies that have brought them under scrutiny from 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 around their legality.
In the United States, the US Securities and Exchange Commission (SEC) has yet to recognize ICO tokens and investments, leaving uncertainty around decisions about their regulation. This is why it may be better to invest in startup ICOs that are linked to law firms.
High Potential for scams
Another thing with unregulated ICOs is that there is the possibility of fraud or scam attacks. Those who bet on ICOs tend to be unsophisticated investors.
Investors do not know if a project that has not yet been launched will ever be launched. ICOs don’t even disclose personal information. So from what you know, this is all one big money laundering scandal. On the other hand, there have also been cases in which this has happened with crowdfunding.
Higher Chances of failure
A startup that raises its capital through ICOs has a higher probability of failing. In fact, a report by a small team from Boston College in Massachusetts found that 55.4% of token projects fail in less than 4 months.
Conclution
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 of them don’t. Whether it is a moral thing or not depends on how you view the consequences and how good your marketing skills are.