The new cryptocurrency innovation presented to us a fresh, out of the box investing option- the Initial Coin Offering (ICO).
Mastercoin, in 2013, reportedly conducted the first ever ICO via a fundraising event that lasted for almost one month. It raised close to 5,000 bitcoins, valued around $500,000 at that time. Since then, we saw the launch of a new ICO every other day.
What is ‘Initial Coin Offering (ICO)’
A tool for fundraising used by startups working on the groundbreaking blockchain projects is Initial Coin Offering, also known as ICO. Although ICO is similar to an IPO, but with some notable differences. Crowdsale, crowdfunding and token sale are the other popular terms for ICOs.
In order to bypass the capital-raising process, startups use an initial coin offering. In this, a percentage of the cryptocurrency is sold to early backers of the project in trade for legal tender or other cryptocurrencies.
The plan for raising money through ICO is usually plotted upon on a whitepaper stating the essentials about the project, its needs, capital required, token allocation and distribution and the details concerning the ICO campaign. Enthusiasts and supporters of the project buy the distributed cryptocoins with fiat or virtual currency in a fashion which is similar to offering a company’s share for buying. If the funds requirements are met within the specified timeframe, the money raised is used to initiate the project.
Early investors in operation are usually motivated to buy the cryptocoins in the hope that the plan becomes successful after it launches which could translate to a higher cryptocoin value than what they purchased it for before the project was initiated.
ICOs are similar to IPOs and crowdfunding. Like IPOs, a stake of the startup or company is sold to raise money for the entity’s operations during an ICO operation. However, while IPOs deal with investors, ICOs deal with supporters that are interested in investing in a new project much like a crowdfunding event.
So, on the off chance that you have some cash to invest, you can run with a known, Initial Public Offering (IPO) based organization or bolster one of the young startups with ICO. What would you pick, and what is the difference?
IPO vs ICO
The first and the main difference: IPO is most often for all around settled organizations, whereas ICO is more for the youthful and risky. It would be appropriate to say that IPO is a 50 years old planting gear organization proprietor whereas ICO is a young PC nerd fabricating his supercomputer in his dad’s garage.
The first has a conventionally known, lucrative business, a strong financial base and a favourable business record. The second one has nothing of the above- can be the next Elon Musk or the ‘brilliant’ idea will get overlooked in a few years.
Regardless of whether you put money into a young and obscure computer virtuoso or a respectable middle-aged and experienced businessman, the expectation is the same. You trust that the business will develop and your profit will grow in the same manner.
Now, let’s further compare the differences between these two:
On the off chance that you put your money into an organization from your nation, it is entirely straightforward. There is typically a legitimate strategy that you need to put resources into a foreign company, so you will in all likelihood need to use a broker who has contacts and the knowledge of these companies.
There are various necessities that an organization needs to satisfy before posting its offers through an IPO, including having a base income edge and a decent reputation. Customary IPO issuance can be an extensive process, because of the requirement of legal and compliance forms. Another necessity is a prospectus. The plan represents a legal statement of its goal to issue its offers to people in general and should incorporate key data about the organization and its upcoming IPO to help potential investors in settling on an educated choice. In this way for an IPO, you require lawyers, banks, and persistence.
The stocks obtained through an IPO speak to a proprietorship stake on the future income of the organization. Investors get profits yearly, depending on the organization’s progress amid the year. Another approach to profit is to contribute in the initial phase and offer the stock when its esteem rises.
The main thing you need to start investing in an ICO is access to the Internet. You can purchase tokens of any organization from any nation. A special case to this are some US projects that are characterized as securities. These undertakings are not accessible to US citizens or else the ventures will require an IPO-like announcing, which is against an essential drawcard of an ICO. Since ICOs don’t expect adherence to any administrative system and legal protocol, their lion’s share do not have a reputation with only a white paper to backup their project
The whole ICO process is significantly shorter in length. More often than not, an ICO venture issues a white paper but unlike IPO; its organization has no standard. Additionally, take note that in a few nations such a paper isn’t viewed as an authoritative record by any stretch of the imagination. Thus, for an ICO, you require developers and the Internet.
The primary concern to remember is that coins do not concede responsibility for the venture. There are numerous ways that investors of the coins may receive future rewards, and that relies upon how the coin is organized.
Does it imply that IPO is more secure than ICO?It may seem so, but not necessarily.With all the narrative, checks and lawful necessities, the organization running at present can wind up bankrupt, and your speculations will no longer hold any value. If you pick a promising ICO venture, it may turn out to be exceptionally beneficial instead.In both the cases, it is profoundly prescribed to learn all accessible sources thoroughly for finding a venture worth your cash.
Why go for ICO?
One of the chief advantages of investing in ICOs is that it opens up the chance of investing in a new or upcoming startup or a technology. Every single ICO launched aims at revolutionising an industry in one way or the other. As an investor, you are just one step away from getting on board to the right startup via the careful analysis of ICOs.
The prices of the ICO tokens allow even small investors to participate in the sale. Unlike a traditional IPO, small investors have a chance to invest little money, and if the underlying project does well, the investor reaps tremendous returns in the future.
The best part is that ICOs follow the limited supply and demand principle, allowing their cryptocoins to gain value in the future. Henceforth, increasing their chances of rampant profiting.
In today’s scenario, cryptocurrency can be used to purchase the services offered by the underlying company.If fortunately, the cryptocurrency gains popularity and market trust, chances are that it could be used it for third-party purchases as well, just like Bitcoin.
Risks associated with Initial Coin Offerings (ICO’s)
Although there are successful ICO transactions on record and ICOs are poised to be disruptive, innovative tools in the digital era, investors are cautioned to stay aware as some ICO or crowdsale campaigns are fraudulent. While there is a potential of blockchain technology for financial services, ICOs are currently vulnerable to misrepresentation, fraud and manipulation.
Below explained are the different types of risk ICO investors face and ways to overcome them:
Since there is no definitive ruling on ICO tokens and investments, there is much debate about which token sales are subject to securities regulations and how these rules might impact startups.
Investors must also recognise that although ICOs provide startups with the opportunity to raise the required capital to launch their projects quickly, the majority of startups will still most likely fail. So in-depth ICO research is a must before making an investment decision.
- Speculation and Manipulation drive Financial Market
ICOs are considered to be highly-speculative in the market and have the risk of generating volatility in the prices or potential loss. Daily fluctuations in the prices of tens or even hundreds of percentage points are usual. The tradability of many tokens is moreover limited, meaning that it is relatively simple for malicious parties to manipulate prices.
- Cyber Attacks & Fraud
Cryptocurrency is prone to cyber attacks and frauds due to the lack of regulatory guideline. Cybercriminals aim at finding opportunities to steal investor’s funds. Phishing scams are the most common attacks, whereby attackers impersonate another individual, such as the founder of an ICO, and deceive them into revealing personal data or paying the attacker their funds.
- Transparency Issues
It is difficult for the investors to assess the real value of an ICO and to distinguish real ICOs from fraudulent projects due to the lack of transparency in the basic matters such as the risks associated with the project, the rights of the holder of the tokens, or how the capital raised will be used.
- The Knowledge and Expertise required
The advent of Blockchain technology has enabled start-ups to obtain financing through an ICO from anyone via an Internet connection and a digital wallet. Yet again, without expertise and in-depth knowledge of blockchain technology, it is virtually impossible to distinguish viable business models from projects with little or no added value.
- Anonymity – Untraceable Transactions
Transactions in cryptocurrencies cannot be traced, due to their decentralised and anonymous nature. Being able to raise vast amounts of money in a short period of time, makes ICOs an attractive means of criminal laundering money.
How to Evaluate the Authenticity of an ICO?
The best way to evaluate an ICO is to analyse every single aspect of its project.
- Identifying the strong points and weak points of the business model to check how does the company integrate crypto token with its business model and analysing the usage of the crypto token outside its ecosystem.
- Community feedback will be a very helpful tool here as the ICOs are announced on community forums and the marketing part kicks in afterwards. Visit the Reddit, Twitter or Facebook pages of the projects.
- Checking the state of the product is another way of escaping fraudulent ICOs. ICOs with a product near completion or halfway down the development track is more trustworthy.
- Researching the intensity of the competition faced by the project in the market can also be beneficial in checking it’s profitability.
The investors are increasingly looking out for more profitable venues and a crypto investor can garner huge profits with careful market analysis. However, IPOs continue to gain traction owing to their pre-established authority in the financial markets. The battle will continue to pique interests of new investors and disrupt financial markets.