The Pros and Cons of Investing in an ICO - An Opinion

An ICO (Initial Coin Offering) is an initial offering of coins—or, more precisely, “tokens”—that represent a certain value. The ICO process begins before the project itself is launched, and the funds raised are used to create the product described in the white paper. Unlike an IPO (Initial Public Offering), an ICO project is typically launched at an earlier stage. IPOs are generally accessible only to individuals with significant capital, while participation in an ICO is open to anyone interested. Most ICOs have one or more white papers that describe in as much detail as possible the business processes, the creation and use of the new cryptocurrency (tokens) within the project, along with additional benefits or any other functional capabilities. Practice shows that an ICO allows investors to purchase these tokens in exchange for other cryptocurrencies, usually Bitcoin or Ethereum. However, it is essential to clearly understand all the advantages and disadvantages of such a risky investment method as an ICO.

Advantages of ICOs

– ICOs offer great opportunities for promising projects (given the success of the Ethereum project): ranging from the second most popular cryptocurrency after Bitcoin to the creation of a platform for blockchain-based services. All of this was achieved through an ICO.

– An ICO does not require excessive documentation. However, to raise funds through an IPO, project developers must go through numerous bureaucratic procedures, gathering various documents. For an ICO, the main and most essential document is the White Paper, which contains all the details of the project, and an ICO is a form of crowdfunding (collective funding; for example, one of the most well-known such projects is Kickstarter). Thus, anyone can review this technical document and choose the most attractive project for investment.

– Building a new community. This means that project creators have the opportunity to build a new community around their projects. Having a community lends credibility to the product. The opinions of community members are valuable regarding specific projects, which also attests to the integrity of the project creators.

– Access to potential tokens in the early stages, given the low price at the start of the project. In some truly successful projects, tokens can become quite valuable cryptocurrencies. Thus, ICOs provide investors with the opportunity to invest in newly created tokens, which can then rapidly increase in value.

– ICOs as a driver of innovation. Today, the popularity of ICOs has led to positive developments in the field of technology, particularly by providing a huge incentive for creators to innovate and develop interesting projects.

Disadvantages of ICOs

– The ICO process is very attractive to scammers, as it does not require extensive documentation and, consequently, offers no guarantees to investors. Consequently, some project creators produce fake white papers, and sometimes deliberately omit many important details when describing their projects in their white papers. Thus, projects that seem attractive at first glance may later turn out to be outright scams. This negative aspect of ICOs has led the public to view blockchain technology with skepticism, even though it has not yet fully realized its potential.

– Unlike with an IPO, investors do not have the same legal rights as shareholders.

– Speculation is possible. People who invest in an ICO are investing in the project’s idea itself. Investors review the white papers and invest if they believe the team is trustworthy and the project itself is guaranteed to succeed. Most startups are considered failures, and those using blockchain technology are no exception. The possibility of hacker attacks should not be overlooked either.

– Storing coins in crypto wallets can be problematic for ICO participants. This means that it’s easy to store only coins created on the Ethereum blockchain, but not those created outside of it.

– External pressure from regulators. The rise in the number of scammers and unregulated funds within the ICO space is leading to attempts to regulate the ICO process, despite the fact that the very idea of cryptocurrency is based on decentralization and being completely beyond government control.

It should be noted that ICOs will likely continue to exist as part of cryptocurrency and blockchain technology. After all, it is impossible to ignore the fact that ICOs have created new innovative technologies and remain a driving force for the adoption of various technologies in the future.

According to data from coinmarketcap.com, as of July 2017, there were over 800 cryptocurrencies in circulation on exchanges, which indicates that ICOs are conducted on a daily basis.