ICO is probably a term that you have come across numerous times when researching cryptocurrency and have maybe wondered what it means.
In short, it stands for ‘Initial Coin Offering’ and can also be called a ‘token sale’. It is where a new cryptocurrency is offered at a specific rate.
A company does this to raise money to build what they are planning to create.
As a trader, ICOs can be a great way to make a profit. This can be done by buying at a very low price during the ICO and sell after the product goes live when prices will likely rise.
2017 was a big year for ICOs and a lot was raised, however, more ICOs today are private, not public and many people do not hear about them.
It is widely believed that they now raise more money privately than publicly, offering investment largely to whale investors.
ICOs shouldn’t be confused with IEOs (Initial Exchange Offering), which is a fundraising event for a cryptocurrency exchange.
One of the most recent IEOs is that of LEO, the utility token for the Bitfinex exchange.
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Are ICOs a safe investment?
There are plenty of things to be aware of before diving into an ICO.
One of the most vital things to remember is that most cryptocurrency projects will likely fail. Investors need to be very realistic when it comes to expectations.
If you can’t figure out what makes a cryptocurrency different from all the other options, then it probably is not worth the investment.
Simplicity is another thing to look for. Look at Bitcoin, the most successful cryptocurrency. While the idea behind how it works is complex, it is solving a simple problem.
A famous phrase from Peter Lynch goes: “Never invest in any idea you can't illustrate with a crayon.” It especially rings true with cryptocurrencies.
ICOs are susceptible to pump and dump schemes or just downright theft of funds and the problem is all too real.
Pump and dump schemes are where the person seeking investment already owns a good deal of the cryptocurrency and after the price has risen after the ICO, sells all that they own, dumping the price and running away with investors funds.
Not all ICOs are scams and this shouldn’t discourage you not to participate in an ICO. It just requires that you do a good deal of research before taking part.
Key things to look for include:
- A roadmap. This should properly explain the steps that the organisation are going to take as they grow.
- Transparent team. The team behind the project should have revealed their identities and should have a good reputation.
- Open-source. This is not always necessary but is a good sign if they are open about how their system works.
- Realistic returns on investments. Most will not be able to give you a real idea of how much you are likely to make back, but if it is a large percentage be wary.
Well-known ICO scams
A good way to understand what to look for in a scam is by examining scams that have already taken place
Pincoin and iFan
These were two ICOs that were done by the same company, Modern Tech, from Vietnam.
On the surface, they seemed like legitimate ideas, which of course any scam needs to appeal to people.
iFan was supposed to be a platform for celebrities to promote content to fans and Pincoin claimed to be building an online platform for advertising, auctions, investment and marketplace.
A key thing to note about Pincoin was that they claimed that investors could expect profits of up to 40%, which is a ridiculously large claim.
Modern Tech’s scam wasn’t particularly complicated. They simply took everyone’s money and then disappeared. There was no pump and dump.
Up to 32,000 people were victims of the scam and a total of approximately $660 million vanished.
This perhaps one of the most famous ICO scams so far and was known for getting boxer Floyd Mayweather and musician DJ Khaled involved.
The two founders were eventually arrested and charged with fraud after they raised $32 million.
US Securities and Exchange Commission (SEC), claimed that the two created fictional biographies of executives and posted misleading marketing materials.
It just goes to show that you cannot wholly trust what companies claim. You have to look much further than the materials they offer.
Plexcoin wasn’t as successful as Modern Tech and only managed to steal approximately $15 million.
Perhaps the biggest sign that Plexcoin was a scam was the absurd claim that investors could expect up to a 1,354% return in 29 days.
Plexcoin is also one of the few times the SEC has gotten involved with an ICO while it was taking place, freezing the funds.
As ICOs are still a very new concept in many parts of the world, they occupy a grey area in terms of government regulation.
However, regulation on ICOs is slowly catching up in different places, though there is not yet any global consensus on how they should be regulated yet.
Regulation is growing not just because of scams, there is also concern over what happens with the funds that are acquired and if everything claimed by an ICO is true.
China and the USA are perhaps the strictest on ICOs.
In China, ICOs are completely banned. Before this, Chinese investors were very active in ICOs, raising approximately $400 million.
Many platforms in China also now ban ICO advertisements.
However, it is worth noting that China may allow ICOs in the future and that the ban is only temporary until a regulatory framework is in place.
In the USA, ICOs operate in a more complicated landscape.
While the SEC is largely responsible for regulating ICOs, they do it on a case-by-case basis depending on if they consider them securities or not, which can be hard to determine.
By understanding how ICOs are regulated in your country, you can keep safe from losing your funds.
Many involved in cryptocurrency may look at ICO regulation as a bad thing because they don’t believe that governments should medal in cryptocurrency.
However, from a traders viewpoint, regulation is a good thing and will keep you safe. It just may be the case that they will require more information about you.
What are the biggest ICOs?
Some ICOs have been very large and in many cases, they are ERC-20 tokens launched on top of Ethereum.
- DomRaider - $65,890,000
- Launched their token to fund the growth of their company and auction blockchains worldwide.
- Tron - $70,000,000
- Now one of the top cryptocurrencies, the Tron project is very large and aims to decentralise the Internet. Tron’s founder, Justin Sun, is very well-known and liked, and many have commented on his great marketing skills.
- Bankex - $70,600,000
- A company working on creating a Proof of Asset algorithm. It is worth noting why the project is appealing; it is something easy to understand, a slight twist on an idea people already know about.
- Aragon - $73,000,000
- A project to create tools for decentralised organisations. Aragon has lost approximately 58% of its value since its ICO. Though that amount may sound high, others have not been so lucky.
- QASH - $105,000,000
- Pronounced ‘cash’, QASH is the native token to the Quoine platform and hopes to solve issues of liquidity in cryptocurrency investments.
- Status - $108,000,000
- A project that plans to create a wallet, messaging service and browsing service that upholds human rights.
- Bancor - $153,000,000
- A decentralised liquidity network where you can swap any cryptocurrency for another.
- SIRIN LABS token - $157,000,000
- They aim to bridge the gap between the blockchain economy and mass market. Unfortunately, since the ICO, the project has lost as much as 98% of its value.
- Tezos - $232,000,000
- Essentially strives to be the last blockchain. They have a key focus on on-chain governance and believe it will make it the most sustainable blockchain ever. Their ICO raised supposedly 10 times more than they expected.
- Filecoin - $257,000,000
- Filecoin’s ICO has raised the most so far but since then the value of Filecoin has dropped substantially, losing as much as 62% of its value.
By reading about successful ICO, you can see what things people are looking for in an ICO.
If you remember anything from this article, make sure it’s these key points.
- ICOs are a great way to make money. After the ICO, the price often shoots up and many sell their investment to make a quick profit.
- Investors should do a good deal of research before investing. Remember, most cryptocurrencies will likely not succeed in what they plan on building.
- Scams are real. Look out for the telltale signs of scams, one of the biggest being the promise of making impossible gains.
- Regulation is slowly catching up with ICOs. In many countries, though they are regulated in different ways.
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