You have probably heard the term ICO if you have been following cryptocurrency for any length of time. This term refers to an Initial Coin Offering. It represents the first time that a new form of cryptocurrency is being made available to the public. An ICO is used by many developers of cryptocurrency to fund their ventures, and some of them have raised millions of dollars in capital by selling their tokens in this manner. If interested in learning what is an ICO, stick around and keep reading.
Initial Coin Offerings Refer to the Distribution of Digital Tokens
Whenever a new coin is created by cryptocurrency developers there will generally be an ICO to announce its launch. During the ICO the tokens will be sold for a fraction of what the developers expect the token to ultimately be worth. Sometimes this works out and sometimes it doesn’t. Many altcoins have been issued that never appreciated in value on a cryptocurrency exchange.
In most cases potential investors will purchase tokens during an ICO with another, more established form of cryptocurrency such as Bitcoin or Ethereum. The amount of tokens given in exchange for Bitcoin or other cryptocurrencies is set by the developers, and the amount can be rather arbitrary.
There are numerous costs that are associated with the launch of a digital token. Developers and others who work on the project must be paid for their work. The coin must also be advertised. A website must be built and a whitepaper must be published. All of these things involve expense, and the ICO helps to cover those expenses.
The History of ICOs
In 2013 a new developed named J.R. Willet came up with an alternative to Bitcoin called MasterCoin. Willet published his own whitepaper and described new protocols for MasterCoin. Willet had in mind to improve upon what he felt were shortcomings in the Bitcoin architecture. It was a grand plan but Willet needed money to fund the development of his venture.
In the same whitepaper Willet proposed a method of crowdfunding which he called an ICO. Individuals would be able to purchase MasterCoin for a fraction of its expected value. Willet launched his ICO and in August of 2013 was able to raise $500,000 in Bitcoin. The expectations for success were very high. Unfortunately, a whole host of problems prevented MasterCoin from ever getting off the ground. This serves as a cautionary tale to anyone that considers investing in an ICO.
Where MasterCoin failed, Ethereum succeeded. Developer Vitalik Buterin was obviously influenced by the model of Willet and conducted his own ICO for the coin that would ultimately become Bitcoin’s primary rival. The success of the Ethereum ICO proves that this model of fundraising can work, but success or failure seems to be linked to the overall expertise of the developers in not only blockchain construction but marketing.
In September of 2014 the Ethereum ICO raised an astounding 18.4 million in funds. This money allowed Buterin to build the platform that he wanted to build, and Ethereum has gone on to become arguably the second most popular coin behind Bitcoin.
ICO Frauds
Sadly, ICOs seem to be ventures that are ripe for fraud. One study has revealed that almost 80% of ICOs in 2017 were frauds. This has led to Internet giants like Facebook and Google banning ICO advertising on their platforms.
It seems all too easy for someone to announce an ICO, write a whitepaper, market it, and bilk millions of dollars out of unsuspecting investors. This begs the question, why do people go crazy for ICOs in the first place?
Most people are looking for the second coming of Bitcoin. They want to get in on the ground floor of a cryptocurrency before it skyrockets in value. The problem with this mentality is that most new altcoins are turning into failed ventures. Some of them are even doomed before they start. This makes investing in ICOs a risky venture. But those who support ICOs argue that taking the risk is no different from investing in an initial purchase offering of a stock.
Before You Invest in an ICO
Before you invest in an ICO you should do your homework. There is no benefit to investing in a coin that is going nowhere fast. Among the things that you should consider is the reputation of the development team behind the ICO.
A legitimate coin offering will be conducted by individuals who have vast experience with cryptocurrency. They will likely have participated in other digital token ventures with a large measure of success. These developers should be known to everyone that wants to participate in an ICO, and the coin should have an established website and whitepaper.
Another thing you want to look for is a realistic projection of what the coin can accomplish. It is not enough to simply create a cryptocurrency and make it available for purchase. New coins need to solve a problem. They need to improve upon the blockchain or fix existing problems with cryptocurrency. It is also beneficial if the token has attracted support from financial institutions and companies who recognize its ability to improve trade. These are the ICOs that tend to succeed.
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On the opposite side of the spectrum you should avoid ICOs that have an absurd concept. Consider the premise of XPAT, the token of the Bitnation. This project was created by developers who envision a world without countries in the traditional sense. They claim that everyone has the ability to form their own virtual nation and self-govern. It all sounds very good until you realize that everyone lives in the real world and not inside of a computer. And the real world is owned by some prevailing authority that will not likely relinquish its control.
XPAT experienced a moderately successful ICO, but the token has thus far failed to gain traction on any of the cryptocurrency markets. A coin is of no value to the holder if it has no worth. You cannot reap rewards from a concept, no matter how noble it is. You can only reap benefits from an asset that goes up in value.
You should also be wary of ICOs that don’t have much transparency. The developers should be actively engaged in answering questions on a Telegram channel, and the coin in question should also have a strong social media presence. The absence of these things likely means that the ICO is a scam and should be avoided.
The Future of ICOs
In all likelihood the halcyon days of Bitcoin are gone. It would be a rare occurrence if a coin exploded the way that Bitcoin did. Even the creator of Ethereum has stated that he believes the age of massive crypto gains is over. Most ICOs today seemed doomed to languish on exchanges, if they ever make it that far.
What could happen as a result of the number of outright ICO scams is that regulators and government officials will begin to push for more cryptocurrency regulation. It is easy to envision a time in the US when an ICO will be subject to the full oversight of the Securities and Exchange commission. That would likely create fewer ICOs as developers would have a harder time getting their offering approved.
But ICOs have also contributed positive discussion to the way projects can be funded in the digital age. The ICO is a non-traditional way of financing, and this is important to those who do not have the means to secure traditional financing of their ventures. Crowdfunding has become wildly popular thanks to sites like GoFundMe and Indiegogo. ICOs are doing the same thing for cryptocurrencies, and there is nothing wrong with that at all.
