If you are wondering ‘’what is an ICO in Crypto’’ and looking for “a reliable ICO guide,” you came to the right place. This article will help you to understand what ICO is, how it works, its risks, and rewards.

What Is an ICO in Crypto ?

An ICO is an abbreviation for Initial Coin Offering. It’s a new way to raise money for a crypto project by issuing tokens. Think of it as an echo of the traditional IPO (Initial Public Offering) in the stock market. Just like an IPO, investors buy into an ICO in the hope that the tokens they purchase will be worth more in the future. Often, startups use ICOs to bypass the rigorous and regulated process of raising money from venture capitalists.

New projects use it to sell freshly minted crypto tokens in exchange for Bitcoin, Ether, and other prominent cryptocurrencies, and, at times, fiat money. Initial Coin Offering(ICO) somewhat resembles Initial Public Offerings (IPO), except that ICO’s are mostly unregulated and grant little to no rights to investors.

Now the question arises “why would anyone buy or launch an ICO?” Let’s explore how ICO’s can be beneficial for their stakeholders.

ICO Benefits

Following benefits are enjoyed by the investors:

ICO Risks

It is pertinent to say that ICO’s are not risk free. Like most of the investment instruments ICO’s too have some risks associated with it.

Token buyers face following risks:

At the end of this article, you will find a list of red flags that may indicate the ICO project is a scam. 

For the time being, let’s take a quick look at how ICOs came into existence.

A Brief History of ICOs

The first ICO was conducted in 2013 by Mastercoin, a digital currency and communications protocol, a project that sought to build a decentralized marketplace for goods and services. In order to fund the project, Mastercoin sold what were essentially digital tokens, or shares of the company, which could be used to purchase goods and services from a catalog of third-party vendors on the decentralized marketplace.

It raised approx. $5 million. Soon it was followed by the Ethereum ICO, which managed to raise around $18 million at the time.

Since 2014, the ICO market was steadily growing but didn’t see an explosion until 2017-2018. It saw 875 ICOs in 2017 alone, almost 30 times more than in 2016. They helped raise over $6.2 billion, compared with $96 million in 2016. Still, the record year for ICO’s was 2018 with more than 1200 ICOs which resulted in $7.85 billion raised.

The largest ICO to date is that of EOS, a decentralized application network, which raised over $4 billions in several rounds during 2017 and 2018. Since the ICO explosion in 2017 and 2018, the interest in ICO’s began to decrease.

How does ICO work?

There are four key components involved in an ICO: a) the project that issues the ICO, b) the currency issued (token), c) the platform used to issue the token, and d) the pre-ICO and ICO dates.

A project or a company specifies its intentions to hold an ICO by publishing a so-called whitepaper.This explains the project, its goals, how much capital it needs to raise when the ICO is scheduled, and other information to help investors decide whether to participate and gain their confidence.

In exchange for making an investment, an investor gets the project’s cryptocurrency, usually referred to as a token categorised into security and utility. Depending on the project, tokens may be acquired in exchange for other cryptocurrencies or fiat money like US dollars, euros, and so on.

Most of the ICO tokens are issued on app platforms. As of 2022 January, the most popular token issuance platform is Ethereum.

ICOs let startups and other companies raise capital much more easily than, for example, by selling shares or bonds or getting loans. The market is still largely unregulated, and they don’t need to deal with venture capitalists or banks. Going forward, however, raising capital via an ICO can be expected to become more and more complicated as the market matures and new regulations are introduced.

Cryptocurrency ICO vs. Stock IPO

ICO and the stock IPO market are both different, but they share similar traits. Most ICOs, by definition, are not registered, and most investors never see the company’s actual business plan. They are often funded by a small number of investors, the company itself, or a group of companies that are invested in the project.

Most ICOs are based on the idea of creating a digital token, also referred to as a utility token, that functions as a means of exchange on a specific platform. The purpose of the utility token is to provide access to a specific platform or service. For example, if you had an ICO to create a cryptocurrency lending platform, your utility token would grant access to your lending platform. Investors would purchase the utility token in the hopes that it will increase in value, either due to increased demand for the platform or due to the success of the platform.

Some ICOs have been referred to as Security Tokens, meaning that they are securities. These security tokens usually come with an obligation to pay dividends and/or provide an ROI. There are a lot of different types of security tokens

Are ICOs Legal?

The answer is maybe. There is no clear regulatory framework regarding ICO’s yet, so it is an utterly gray area. In the future it is likely to be regulated; therefore, most ICO’s are required to comply with KYC/AML rules. As of now, it’s too difficult to impose any limits, since most officers are hesitant to put restrictions on a potentially world-changing technology.

United States Securities and Exchanges Commission (SEC) treats ICO’s differently. If the token being sold is merely a utility token, it does not classify as financial security. However, if the token has qualities of an equity coin with a sole purpose to appreciate in value and benefit its investors, then it can be treated as security and must comply with the legal processes.

At the end of the day, until a regulatory framework is imposed, most people will continue to use ICO’s as a tool for fundraising.

How to Identify a Scam ICO

One of the biggest risks of investing in an ICO is that you don’t know what you are investing in and it may turn out to be a complete scam.

According to Ernst & Young, almost 10% of all funds raised by ICO’s end up in the scammers’ wallets.

However, there are ways to identify scam ICOs. Do your own research and look for these common signals:

Not all ICOs are scams. With due research and through checking if you can put your money in the right ICO’s you can make some handsome money in no time taking “fast mover advantage” of ICO’s.

Conclusion:

ICOs are changing the way we invest in cryptocurrencies and more importantly, they’re making it easier for even small investors to put their money into something big.

ICOs offer a “first mover” advantage. The first company to issue a cryptocurrency and take up the challenge of building its own blockchain network can reap significant rewards. At the same time most ICOs offer a high risk return for early investors, giving them massive returns on their investments.

ICOs are a high-risk investment, and you should never invest more than you can afford to lose. Many ICOs are scams, and even if the project is legitimate, there’s hardly any guarantee that the token will have any value once it hits the exchanges. Always do your research before investing in any ICO, and make sure you understand what you’re buying. There have been cases where people have invested in an ICO only to find out that the project was a scam, and they lost all their money. Make sure you’re aware of the risks before you decide to invest.