Bitcoin created a revolution by introducing the first ever decentralized digital currency where people and businesses control their transactions instead of banks and credit cards. Now we have another revolution in the form of initial coin offerings (ICOs).
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 Bitcoin, Ethereum or other types of cryptocurrencies. It’s like another form of crowdfunding.
Benefits of ICOs
Like Bitcoin, the main advantage of ICOs is that startups do not have to deal with third-party authorities, such as banks and venture capital investors. ICOs provide a number of other conveniences, namely:
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Raising 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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A limited supply-demand principle where cryptocurrencies gain value in the future
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Tokens have a liquidity premium
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Little to zero transaction fees
ICOs started gaining popularity in 2017. A great example from May 2017 was the ICO for a new web browser known as Brave. It generated over $35 million in just under 30 seconds. In October of that year, the total ICO coin sales conducted 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 technology, especially when millions of dollars are involved, there has been criticism and scrutiny from regulators. ICOs are associated with risks, scams and controversies that have brought them under the scrutiny of professional businesses 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, ICOs have faced much speculation, debate and criticism surrounding their legality.
In the United States, the US Securities and Exchange Commission (SEC) has not yet recognized ICO tokens and investments, leaving uncertainty around the decision to regulate them. Therefore, it may be better to invest in ICO startups that are affiliated with legal firms.
Helloh Potential for fraud
Another thing about unregulated ICOs is that there is potential for scams or fraudulent attacks. Those who bet on ICOs are usually unsophisticated investors.
Investors don’t know if a project that hasn’t been released yet will ever be released. ICOs don’t even reveal personal information. So as far as they know, this whole thing is one big money laundering scandal. On the other hand, there are also cases of what happens with crowdfunding.
Taller Chances of failure
A startup that gets its capital through an ICO has a higher chance of failure. In fact, a report produced by a small team at Boston College in Massachusetts found that 55.4% of token projects fail in less than 4 months.
Conclusion
After all, ICOs are fast and efficient crowdfunding opportunities, but with quite high risks in terms of security, regulation and high chances of failure. It works for some startups, but a lot of them fail. Whether it is something that is moral or not depends on how you consider the consequences and how good your marketing skills are.