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ICO |
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An Initial Coin Offering is a form of crowdfunding. An ICO is similar to an Initial Public Offering (IPO) in the stock market. ICOs were the first way that crypto and blockchain startups started raising funds from investors.
In an ICO, a company will offer their blockchain-based token, and any investor can buy these tokens using popular cryptocurrencies such as Bitcoin (BTC) and Ethereum (ETH) or using stablecoins such as Tether (USDT). The tokens offered by the company can later be traded on a decentralized exchange (DEX) or a centralized exchange (CEX).
The history of ICOs dates back to 2013, when Mastercoin launched the first ICO. The platform managed to raise around $600,000 from the process. Ethereum, the second-largest blockchain network by market cap, also launched an ICO in 2014. The ICO raised $18 million within 42 days.
The best thing about ICOs is that they allow companies to raise funds without going through the extensive process of getting regulatory approval. While this is advantageous for the project, it poses significant risks to the investor. Below are the pros and cons of ICOs as a funding method:
Pros
One of the major benefits of ICOs is that they make it very easy for a company to raise funds. Moreover, they also provide major returns for the ICO managers. These managers generate tokens as per the term of the ICO and then distribute them to individual investors.
If a project is viable and has potential, an ICO can provide it with the funding needed to push to new levels. Such was the case with Ethereum, where the project utilized the funds to achieve growth. Those who invested in the ICO and have held on to the tokens over the years have also seen major returns.
Cons
The fact that ICOs are not regulated makes them very risky for investors. A project will lure investors into participating in an ICO by promising them high returns. However, most projects end up being fraudulent, and the developers end up fleeing with investor funds.
The US Securities and Exchange Commission has warned about the potential dangers of ICOs to an investor. However, the potential for staggering returns has seen some people fall for projects that never really took off or projects that were abandoned. Therefore, before investing in an ICO, take the time to run a thorough background check on a project to assess its vitality. |
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