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The vices and virtues of ICOs

November 10th 2018

It’s safe to say ICOs are very popular nowadays. In 2017 alone over $4 billion got invested through ICOs and they have proven to be capable of raising massive amounts of capital in ridiculously short times. But what are ICOs, what are the pros and cons, and aren’t there better alternatives available?

What are ICOs?

An Initial Coin Offering (often referred to as ICO) is a mechanism for new blockchain projects to raise funds by offering the tokens of their project to investors before the tokens are listed on any exchange. These ICOs are similar to the more renowned Initial Public Offerings (IPOs), in which investors have the ability to purchase shares of a company.

These ICOs are often carried out by smaller teams in order to raise funds for their new project. Just like with IPOs, a certain portion of all available tokens is offered to the public.

ICOs are often big happenings and usually consist of multiple phases:
Pre-sale: The first phase of an ICO is the pre-sale, where a portion of the tokens is privately offered to major and influential investors. The tokens are often offered with big bonuses or discount to gain the support of these early investors.
Public token sale: After the pre-sale has concluded, the public token sale starts. As soon as this sale starts, everybody has a chance to buy the tokens at the predefined ICO price. Buying these tokens is generally very easy and can be done with a single transaction to the ICO smart contract. The smart contract then automatically sends the new tokens to the corresponding address. The amount of tokens one receives depends on the amount of tokens invested and the exchange rate.
Soft cap is reached:
All ICOs have a soft cap. The soft cap of an ICO is the minimum amount of funds that needs to get invested in order for the ICO to be a success. If this soft cap is not reached by the end of the ICO, the ICO is deemed unsuccessful and the funds are returned to the investors.
Hard cap is reached:
Most ICOs also have a hard cap. The hard cap of an ICO is the maximum amount of funds they are willing to accept. Once this cap is reached the ICO ends. This hard cap is imposed as only a limited amount of tokens can get issued to investors.

Some ICOs are for existing products or by teams that have already proven themselves on previous projects, most ICOs however, present nothing more than a whitepaper. A whitepaper gives a detailed description of the project and is very important for a project.

The pros and cons of ICOs

ICOs have already turned many into millionaires thanks to massive token price increases. But ICOs have also left many scammed without any way to retrieve their initial investments. What are the pros and cons of ICOs?

Pros

High liquidity
This is as much of a pro as it is a con. ICOs provide investors with tokens that are usually easily exchangeable for other assets or fiat shortly after the ICO has been concluded. If an investor is unhappy with the course the project is taking they are able to quickly exchange their tokens.

Because these tokens have high liquidity, investors can also have ‘real-time’ pricing of their token.

High accessibility
Unlike IPOs, ICOs are accessible to anyone, anywhere, anytime. No major initial investments, great connections with the right people, or other things one is not able to obtain easily are needed to invest in ICOs.

This makes ICOs very accessible to anyone, which is one of the reasons why ICOs have gotten so massively popular.

Instant community support
ICOs are essentially crowdfunding campaigns for blockchain startups, which has various benefits. First and foremost these projects will have massive community support. All investors have a vested interest in seeing the project succeed, as this will likely increase the price of the token of the project. Because of this massive support these projects have to spend less money on marketing which can then be used to fund innovation.

Easy to conduct
Just like high liquidity, this property of ICOs is as much of a con as it is a pro. Currently, conducting an ICO is by no means difficult and therefore a very viable option for a relatively new and small company to raise funds to materialize their ideas. By conducting an ICO a new company has the ability to potentially raise a lot of funds in a short amount of time.

Cons

High liquidity
As said above, high liquidity has pros, but also many cons. Many tokens issued during ICOs will only be exchangeable on (relatively small) DEX’s (decentralized exchanges) for the first couple of months, and sometimes for the first couple of years. These DEX’s provide the project teams with the ability to (secretly) sell the tokens of the project thus ‘leaving’ the project before anyone else notices.

Poor regulation
There have been plenty of debates about how to regulate ICOs, but so far no proper universal measures have been taken, making ICOs prime territory for scammers. Since most countries have dealt with ICOs in their own way, it is difficult to conduct an ICO that is fully compliant with the rules in all countries which is why the legality of many ICOs is often questioned.

Scams and poor projects
IPOs are usually only accessible to a small, certain group of people. These people are usually seasoned investors who know which things to look for in new projects.

There are going be lots of great investment opportunities, but with that will come lots of scams. This is not kindergarten, there is no teacher to run to when you get in trouble. -Sharif Bouktila, Stop The Maddness

ICOs however, are accessible to anyone and easy to conduct, meaning almost everyone can conduct an ICO with ease. This has lead to an abundance of funds ending up in the hands of inexperienced, undeserving project teams, or even worse, scammers.

Speculative nature
ICOs are very risky, speculative investments, with often nothing more than a whitepaper and a common believe that the project will succeed to keep the price of the token stable. More than 90% of all startups fail, and blockchain startups are by no means an exception to this rule.

Market manipulation
While some ICOs are insanely successful and get hundreds of millions of dollars, most successfully conducted ICOs get much smaller amounts of money. Making it ‘easy’ for certain people hold significant percentages of the token supply, which they can then abuse to manipulate the market, through insider trading for example. Due to the lack of proper regulation it’s also relatively easy to get away with such malpractices.

Are ICOs still worth it?

Now you are more familiar with the vices and virtues of ICOs, you are probably wondering if ICOs are still worth the risks they bear with them. The answer to that question is unfortunately not simple. It really depends on the project, but we’ll give you a few rules and questions to keep in mind when analyzing an ICO. These will help you stay away from scams and will also help you estimate the actual value of a project.

Here are 3 simple rules.
1. Do your research.
2. Be Skeptical
3. Own your decision.
Some questions to ask when evaluating a project.
1. Who are the team? Can you talk with them on a Zoom call? If not, why not?
2. Why are they raising the money?
3. What are their delivery milestones?
4. Why should you care about this idea?
5. What are they doing different to the other opportunities.
6. Which trusted community members or Block Producers are working with them. If not, why not?
7. Where is the business located? Check that it is real.
8. What references are they able to provide?
9. How long have the team been working together?
10. Can you meet them face to face at an upcoming event? If not, why not?
Taken from “Stop The Maddness”, EOS Dublin

Although ICOs can be an unregulated mess full of opportunities for scammers to trick you out of your precious funds, they can also be a great opportunity for a new company to raise funds and a great opportunity for investors to financially back their favorite projects from the start. Just remember, stay vigilant.

About us

We are Blockgenic, a network of world class technology entrepreneurs and investors looking to make a positive impact on blockchain technology. You can find us here:
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*Disclaimer: Always be cautious when investing in ICOs. Don’t invest money you can not afford to lose*

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