Initial coin offerings (ICOs) are a way for developers of Blockchain technology to raise development funds. ICOs have been used to raise hundreds of millions of dollars for blockchain-related projects, often with limited information about their goals.
ICOs sound similar to initial public offerings (IPOs); however, they are not the same and usually do not offer any legal rights and protections, or claims to any underlying assets. Offers of shares in an IPO do offer legal rights and protections.
The lifecycle of an ICO is usually as follows:
1. A team will release a “white paper” which details the stated plans for a given cryptocurrency, including what it will do, why it is useful, the roadmap for building the project, and a plan to use the funding raised.
Note, that the white paper should, at the very least, provide the names and contact details of the people behind the scheme and information on what they are planning to do with your money. This will help you conduct your own research before committing money to the project.
However, the information in the white paper can be unbalanced or misleading. For example, estimates on profitability may be very optimistic, or it may explain what the technology could do in the future without discussing how difficult it could be to develop.
If the white paper claims the ICO is not a financial product, this may indicate that the promoter is trying to avoid regulation, leaving you with no consumer protection. These papers can also be very technical, which may make it difficult to understand what your rights and obligations will be after you have bought the ICO token, and what the risks are.
2. A project raising an ICO will have a web-page and some form of large group chat to keep people who are interested in the project updated about developments and important dates. These chats often take place on Telegram, a mobile chat application.
Online applications, including social media and messaging apps, have been used to push up the price of tokens, in order to sell them to other buyers at artificially inflated prices. This is known as a ‘pump and dump’ scheme.
3. Before the ICO launches, the project will invite or allow people to register for the whitelist to gain access to the pre-sale round. For popular projects there is usually more interest than availability for the pre-sale white list so spots are allocated by the founding team or by a lottery, or some combination of the two.
You invest in ICOs by sending money or cryptocurrency to a blockchain project, and in return you receive digital tokens related to that project. ICO tokens are held in a digital wallet. Unlike shares, most ICO tokens do not come with ownership, voting rights, or even a promise to share in future profits. If you have no ownership rights, you would not have a claim over the company’s assets if it fails. ICO tokens generally only give you access to the platform or service the project is developing, which could take months or years to function.
The value of ICO tokens can change rapidly. The technology behind ICOs (and the potential uses for this technology) are in the early stages of development, so token values tend to fluctuate based on popularity rather than any real underlying value.
Bloomberg earlier this year (June 2018) states that 81% of ICOs are frauds – resulting from the fact that they are hard to understand or verify.
ICOs are highly speculative investments that are mostly unregulated, and many have turned out to be scams. If the ICO is issued by an overseas entity, it will be even harder to get your money back if it turns out to be a scam. Token values can fluctuate drastically and it is possible for a computer hacker to steal them.
Before you decide to invest in an ICO, you will need to do a lot of research. Look for forums or websites that explain the product in detail and present a balanced perspective.