If you’ve been in the crypto space for a few years, you must have heard of initial coin offering (ICO). You may not know what it means though, so in this guide, we will explain what an ICO is, how it works, and why it is necessary.
It is important to note that every crypto project requires funding to kick off, and the funds are sought through different means. An ICO is just one of the ways this is achieved, and used to be very popular when cryptocurrencies came about initially.
What is an ICO?
An ICO is a way to raise funds to support a crypto project as mentioned earlier. When a new project launches, it creates a token which it “offers” to the public. The tokens are sold in exchange for more recognized cryptocurrencies like Bitcoin, or even fiat money like the USD.
Since cryptocurrencies are unregulated, ICOs are also unregulated and offer no guaranty that the tokens they are selling will bring any reward. However, the trend became more popular still, and only recently started becoming less common as other methods of fundraising have emerged.
How Do ICOs Work?
Whenever a new blockchain project launches, the project releases what is called a whitepaper, which explains everything about the project. This includes the idea behind the project, why it is important and why it is likely to grow.
After considering the whitepaper, investors then decide if they wish to buy the token for the project, in the hope that it appreciates in value. If it does appreciate in value, the investor gains, otherwise, they lose. This makes ICOs quite risky and investors are usually encouraged to invest only what they can afford to lose.
Pros of ICOs
As an investor, there are advantages you can enjoy from investing in an ICO. The following are some of the pros of ICOs.
- You enjoy early access, and can profit hugely if the token gains value over time.
- It’s a way to support project you like, even if you don’t get the financial benefit of the token growing in value.
- You get to enjoy more perks like token distribution which early investors enjoy from the project
Cons of ICOs
Just as there are pros to investing in ICOs, there are also cons, which you should be aware of. The following are the major cons of investing in ICOs.
- There is no guaranty that the token will grow. This makes investing in ICOs a great risk as you can lose everything.
- You’re dealing with a new project, so the team is also new. This means the are also learning how to run the project, which explains why it may fail.
- The project could be an outright scam. Apart from a genuine project not making it due to many uncertainties, the project may also be an outright scam, designed to defraud innocent investors.
How to Identify an Authentic ICO
There’s no way to tell outrightly if an ICO will succeed, because there are several variables to it. However, there is a way you can identify one you should stay away from. The following are key red flags to watch out for if you wish to invest in an ICO.
Team: The most important thing about choosing a project is probably the team behind it. Does the project have a team with its members clearly exposed on the website? If you don’t know the names and see the pictures of the members, it is most likely a scam.
Value Proposition: One thing that may significantly increase the tendency of a project succeeding is the value proposition. What is the project offering? Is it a relevant service at the time the project is launching? If not, you can almost be sure it will not succeed.
An offer too good to be true: If an ICO offers exaggerated returns, it is probably a scam. The promised or projected returns should be realistic. If it’s too good to be true, it probably isn’t true.
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