You’ve seen all kinds of links and ads about startup companies doing an ICO but have no idea what that really is? You’ve come to the right place. In this article, we’d like to shed some light on what ICO means, what it entails and why it might be a little controversial.
What does ICO even mean?
ICO is the acronym for Initial Coin Offering, which wasn’t really a thing until cryptocurrencies spawned and became a trend. The buzzword is borrowed from the term IPO (Initial Public Offering), which is the event of a company “going public,” in the finance world.
When a company goes public, it basically means that they are launching stock options in public, for everybody out there to buy shares of that particular company, with the hope that in the future, the share that they bought, is worth more than it was on the day they bought it. An IPO is often one of the possible exits of a venture capital investment.
So what’s different about an ICO?
An ICO is commonly used by cryptocurrency startup ventures as crowdfunding project to fund the startup company’s costs. The “crowd” provides their funding in the form of traditional currency or via established cryptocurrencies such as Bitcoin or Ethereum.
In exchange, they are provided with a quantity of the cryptocurrency, which they are funding herewith, in the form of “tokens” which are supposedly exchanged into functional units of the newly created cryptocurrency after the ICO project has been completed successfully.
Absence of regulations
ICOs are attractive to companies because they are not regulated, and the startup can therewith gather funding without the cost and effort for regulatory compliance. On the other end, this increases the risk for investors. Some countries such as China and South Korea have banned the practice altogether.
The marketing for ICO crowdfunding projects is often heavily relying on social media platforms including paid ads on the same. Also, as of now, there are plenty of ICO ads being displayed on any kinds of websites that you might visit, but Google will stop showing ICO-related advertisements entirely in their ad-network starting in June, later this year. Facebook already initiated their ICO-ad ban back in January.
Are ICOs always a scam?
ICOs are not always a fraud, but the way they work allows scammers to grab a lot of money from people who believed in the startup. Because of this practice, some top investors suggest legitimate businesses to avoid doing ICOs and continue doing business in a regulated way. Data of 2017 showed that 46% of all known ICO projects have failed and once the payments had been made, the websites and social media profiles have quickly disappeared or were simply abandoned.
This is a little bit like how the public perceived the use of the BitTorrent file distribution system, which is in itself not illegal but often used for non-legitimate file sharing. At the end of the day I don’t want to say that all ICOs are a scam, but like with many types of crowdfunding projects, and investing in general, please be careful where you put your money.
If you like, you can also watch the clip from the Investopedia Academy below. In that video, Lex Sokolin explains a few of the basics about ICOs.
YouTube: Understanding ICOs and if they’re worth investing in | Investopedia Academy