Risks, rewards and dangers of ICOs
Bitcoin created a revolution by introducing the first 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 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 crypto/tokens. Here, investors raise 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 don’t have to deal with third-party authorities like banks and venture capitalists. ICOs provide a number of other conveniences, namely:
- Raising capital from anywhere in the world
- Potentially high returns for investors
- Quick and easy fundraising
- Limited supply and demand principle in which cryptocurrencies gain value in the future
- Tokens have a liquidity premium
- Low or no 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. This generated over $35 million in just under 30 seconds. In October of the same year, the total ICO coin sales made at that time were worth $2.3 billion, more than 10 times its return in 2016.
Risks and dangers of ICOs
Like any new piece of technology, especially considering there are millions of dollars 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 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, leading to uncertainty surrounding the decision on their regulation. This is why it may be better to invest in startup ICOs that are linked with legal firms.
Tallh Possibility of scams
Another thing with ICOs that are not regulated is that there is potential for fraud or scam attacks. Those who bet on ICOs are usually unsophisticated investors.
Investors do not know if a project that has not yet been launched will ever be launched. ICOs do not even reveal any personal information. So for all you know, this is all one big money laundering scandal. On the other hand, there have also been cases where this has happened with crowdfunding.
Higher chances of failure
A startup that raises its capital through ICOs has a higher chance of failing. In fact, a report by a small team at Boston College in Massachusetts found that 55.4% of token projects fail in less than 4 months.
conclusion
In the end, ICOs are quick 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 something that is moral or not depends on how you consider the consequences and how good your marketing skills are.
