What is ICO? Why should you invest in it? What is the difference between ICO and IPO? What are the signs of ICO scam? Get all the needed answers in this informative ICO guide.
CryptoToday – The ICO idea has recently surfaced and it supports the crowdfunding of initiatives and projects in the Blockchain and cryptocurrency fields. While this trend has taken over the world in 2017, many are still wondering “What is ICO?” That is exactly what we aim to answer in this article.
What is ICO?
The ICO stands for initial coin offering. The ICO is an event where a company offers its own unique cryptocurrency to the public, with the intention of receiving funding. The supply is usually limited to a specific number of tokens. Anyone can buy ICO tokens with Bitcoins or Ethers or with fiat money.
The initial coin offering allows the company to receive capital through token sales. The company is then using the capital to fund the development of products and services. The purchaser receives their share in the company as crypto tokens on which they have 100% ownership.
What is the difference between ICO and IPO?
In order order to fully understand the definition of ICO, it is necessary to differentiate between ICO and IPO. Some similarities exist between an ICO and IPO (Initial Public Offering). Also, there are some key areas though that show the difference between ICO and IPO.
ICO Voting Powers
When a company releases its shares during an IPO, it always signifies a share of ownership for the purchaser in that particular company. This is not always the case for an ICO. Voting powers in the case of an ICO can be transferred through the crypto tokens purchased in the ICO.
A larger share of tokens usually indicates a higher voting power in particular projects. That being said, crypto tokens are just a currency unit. Holders of these ICO tokens can transfer them to other users in exchange for other currencies.
Another significant difference is in regulation. Governments all over the globe are regulating the IPOs in a very strict fashion. The company needs to put together a large set of documents together before going public with its shares. Non-compliance with the regulations of the government can also lead to severe legal consequences.
On the other hand, crowdfunding of cryptocurrency is a completely new area. That is why it has not been influenced largely by governmental regulations yet. This means, that with limited resources, any company can start a project ICO.
Also, anybody from around the globe can crowdfund the project through the purchase of its unique crypto tokens. Limited control brings along advantages in terms of opportunities. That being said, risks come along with it due to limited regulation when compared with traditional IPOs.
Use of ICO crypto tokens
What is ICO token’s use, you’d ask? Well, the uses and features of ICO tokens can vary from project to project.
Several service-based companies have raised funds through ICOs with the intention of developing products where the issued crypto tokens can be used as currency within the service. This is apart from its general ability to be traded like other coins.
Ethereum is a great example as well. Ethereum is a platform used to build all sorts of unique decentralized applications. The crypto tokens issued by Ethereum – Ethers can be used throughout different applications built on its platform.
Ethereum clearly highlights the endless opportunities that exist with ICO crypto tokens. It eventually comes down to the project.
There are many benefits one can receive while taking part in an ICO. The main one is you get to be a part of the launch of a company’s new product. Additionally, once the product is live and the value of the crypto tokens rises, you can sell the ICO tokens for a profit.
What is ICO participant’s purpose? Just like every other crowdfunding initiative, the main goal of an ICO participant is to assist in the funding a particular project that they are interested in. The ability to make a profit is an added advantage of the process.
Ethereum once again is a great example. Ether crypto tokens hav started at a price of lower than $0.5 at the time of the Ethereum ICO. Following Ethereum’s main platform release in 2015, the prices rocketed to around the $20 marker. This means that the early backers that believed in the project helped bring it to life with early funding. Not only that, they managed to make a huge return on investment in the process.
That being said, not all projects are like Ethereum, and therefore, profit is never guaranteed. If the ICO succeeds, there is still a possibility that the company itself will not be able to deliver the product as promised. In this case, the crypto token price will most likely never go up. One need to take this risk into account when making the decision of taking part in an ICO campaign.
4 Key signs of ICO scam
There is a number of signs, which can help you identify a potentially fraudulent ICO. These are:
- Anonymous developers
- Uncertain/unrealistic goals
- The lack of an escrow wallet
- No transparency
The cryptocurrency community has, unfortunately, experienced a number of scam ICO campaigns over the past couple of years. In order not to fall victim to this kind of criminals, watch out for the following red flags:
ICO Development Team
What is ICO team got to do with the reliability of the project? EVERYTHING.
The development team behind the project is the people that will be responsible for running the whole ICO process. Thus, if you feel that they seem unreliable or you just feel suspicious about a particular team, it is better to pass. In case developers of the project wish to remain anonymous – it is another sign to stay away from a project. If people decide not to put their reputation on the line, the project might be unreliable, if not fraudulent.
ICO Escrow Wallet
Or, to be more specific, the absence of it. In case all the access to the contributors’ funds is concentrated in the hands of the team behind ICO, be careful. Nothing can stop these people from running away with your money.
How transparent is the ICO project?
Lack of transparency. The reliable and open project should always feature work-in-progress stages in order to keep the audience posted. In case developers do not release code snippets, behind the scene videos, some versions of their products, or any other reports on how the project is advancing – this can’t be right.
Unrealistic or uncertain goals. When an ICO project does not have a clear goal with a detailed roadmap of how to get to this goal, it might indicate that people behind it do not really know what they are doing.
In case you’ve come across an ICO project that shows any of the abovementioned signs, it is recommended to avoid investing any funds with it.
Do you have any questions? Do not hesitate to ask them in the comments section below.