If you’re new to the crypto world, then you’ve probably already heard people talking about ICOs. If you end up on crypto forums, you’ll certainly be inundated in advertisements urging you to invest in ICO after ICO. It’s only natural to wonder – what is an ICO anyway?
I.C.O. stands for initial coin offering. It is essentially a fundraising method for startups. An investor trades something of value – normally a large-cap cryptocurrency – for a token issued by the group seeking fundraising. (Note: when tokens are issued for this purpose, people sometimes talk about the “tokenization” of the project or say the project was “tokenized”.)
In theory, the value of the issued token should somehow be tied to the success of the project. Also, in theory, the team should devote the raised funds to making their project a success. In reality, things are not always so straightforward. In the worst cases – neither of these theoretical conditions hold true.
What makes an ICO desirable for a startup is that token holders are not necessarily granted any legal rights in relation to the startup or project they invest in. The people behind the project are not burdened by regulations. This lack of regulation also makes raising the funds as easy as setting up a webpage and writing a smart-contract. From a legal standpoint, ICO investors have essentially donated their money with blind hope that the team behind the ICO will deliver a valuable product that translates to an increase in token value.
What makes an ICO desirable for a legitimate project… is exactly what makes an ICO desirable for scammers. Always remember this: the burden to protect the ICO investors falls on the individual investors themselves. This is a recurrent theme in the crypto world, because third parties are not normally involved in transactions. Everyone is responsible for their own due-diligence.
Unlike traditional methods of venture capital fundraising, ICOs are open to investors of all levels – anyone can invest. There is no need to be a “qualified” investor or commit millions of dollars. For many investors, ICOs are the only way to invest in risky startups. And startups are risky – in fact, failure risks likely go up in the ICO-funded startup space. Scammers and poorly incentivized ICO structures tip the odds even more in favor of failure. The risks are real. Of course, if the project ends up a legitimate success – so too could be the returns on investment.
The ICO concept democratized project fundraising. Anyone could suddenly tokenize their project to raise funds. Anyone could invest in these projects. Despite the risks involved, the ICO concept is an innovation in and of itself.
Just remember: caveat emptor… don’t blame the innovation of the ICO for your own lack of due diligence.