What Is an ICO?

ICO stands for Initial Coin Offering, and it is a method used by developers to raise funds for a project within the cryptocurrency space. It is a form of digital crowdfunding that enables start-ups to raise funds while establishing a community of incentivized investors who would like to see the project succeed so that the price of the coin rises. A huge number of start-ups have adopted the ICO route, especially during the ICO boom of 2017, of which ventures had varying degrees of success.

ICO vs. IPO

ICOs are comparable to Initial Public offerings (IPO) which in traditional finance is the issuance of equitable shares of a company to the public. Although they are different in that, firstly, ICOs do not give the investors equitable ownership of the company; thus, investors should be aware that they are purchasing the coin to speculate on its future price increase. Secondly, ICOs are not as regulated as IPOs, given that the blockchain space is still relatively new and not much of a clear regulatory framework has been developed.

ICO vs. IEO

Initial Exchange Offerings (IEO) are different from ICO since they are not conducted solely by the developers of a project. The developers will partner with an exchange to list their coins on the given exchange so that users can access them from there. This is beneficial for both parties as the project gets more exposure, and if it is listed on a reputable exchange, it gains more credibility and approval from the community. Alternatively, the exchange will gain exposure to customers and possibly earn more in trading fees.

How do ICOs work

ICO can be performed through different structures of issuing their currency, and generally, there are three main ways that a coin will be launched.

• Static supply & price: The is a limited supply for the coin, and the coin is sold at a pre-set price during the ICO.

• Static supply & dynamic price: There is a limited pre-set supply, and the amount of funds collected during the launch will determine the price per coin.

• Dynamic supply & static price: Unlimited token supply, but there is a pre-set price per coin for ICO buyers.

Apart from the coin supply, an ICO is also accompanied by a white paper that details the objectives of the project, tokenomics, technological application, roadmap, and any other details that can be disclosed to the public. The whitepaper will also contain more details about the ICO, including the length of the ICO, price per coin during the ICO, how to participate in the ICO, and more. The additional information from a whitepaper helps investors decide whether to invest or not.

A team with a functional blockchain enables investors can purchase coins from that network. Alternatively, developers can launch their coin as a token on another blockchain as they continue to develop their own blockchain; the ETH blockchain is the most used network for launching tokens. The tokens can be purchased using ETH or the native coin of the adopted blockchain, and the tokens will be sent to the address used to purchase or any other specified address. Once the new blockchain is ready, investors can swap their tokens for the coins on the new network.

Who can launch an ICO?

Any person with the necessary technology can set up a blockchain. There is little to no regulation around ICOs. Thus, there isn’t much of a regulatory barrier for scammers to create fake ICOs and abscond with the money.

Regulations around ICOs

Regulations will vary in different jurisdictions; thus, it is necessary to seek legal advice before setting up an ICO or investing in one. In the past, some ICOs have been defined as crowd fundings or securities; this later forced the project to comply with the respective regulation. The development of technology outpaces the slow-turning wheels of the legal system, but some governments have already begun structuring frameworks for regulation. This will take time, given that the ability for everyone around the world to participate poses a significant challenge since one jurisdiction cannot create the laws for another. Although, international bodies such as the Financial Action Task Force (FATF) have provided recommendations for a regulatory framework around digital assets, which can be seen as a starting point.

Risks & Benefits of ICOs

Risks of ICOs on investors

According to Bloomberg reports, 80% of the ICO during the 2017 boom were fraudulent projects. Thus, one must invest with caution, especially when there is a lot of hype and euphoria.

• The is no guarantee of an ROI as with any investment. Additionally, one should be aware that ICO investors are one of the earliest investors. Thus, the risk is higher.

• Little to no regulation around ICO; thus, there is a risk of it being a scam with no legal remedies available.

• The team may not have the experience to develop the project, especially in a competing market.

Risk of ICOs on developers

• Regulators may classify coins as security, thus exposing the developers to fines or sentences that could end the project.

• Not much information about their early investors.

• Unstable project funds due to the volatility of the market.

Benefits of ICO to investors

• Early investors are able to make a higher return if the project succeeds; “high-risk, high reward.”

• The project may also choose to reward early investors in the future through airdrops. The Uniswap and ENS airdrop are some popular airdrops made to early investors simply for joining the project early.

• A chance to support a great project with funds and a community so that they continue to develop.

Benefits of ICO to developers

• Quick access to funds with low regulatory barriers.

• Access to funds without loss of equitable ownership of their company.

• Opportunity to experiment with the “new” blockchain technology.

• A community that is eager to see the project succeed and test the product.

How to protect yourself from scam ICOs

Doing your own research on a project is the most important way to protect yourself from an ICO scam. Below are a few guidelines, although not exhaustive, that one may use to verify the legitimacy of the project.

• Anonymous teams cannot have their qualifications verified and are likely to be scammers.

• Tokemomics and token distribution, especially those allocated to private investors, should be investigated.

• Overambitious project objectives with little explanation on how they will be achieved are likely to be scams.

• No roadmap that enforces a deadline pressure on the developers or a way of tracking progress on the project.

• Bitcointalk.org; the largest crypto community thread. Announcing a project here enables the community to scrutinize and verify it. If the developers are skeptical to announce their project to the public, one should be wary.

• The great thing about blockchain technology is that it is built on open-source code. Thus, the community has a chance to investigate how the project works.

• Is the project necessary, or does it add value does it add to the community?

• Media activity is important as this is how the community will be built, and the project will gain a larger user base. If the developers lack a PR team or media presence, the chances of the product succeeding are slim because, without a community, the product cannot succeed.