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Initial Coin Offering: The Pros and Cons of Executing an ICO

An initial coin offering (ICO) is the new phenomenon that has captivated the tech industry. Changing the way startups raise capital, ICOs are available to the general public and offer the opportunity to acquire cheap tokens that will rise in value over time.

The idea of this process means people may take part in shaping the future of the cryptocurrency ecosystem. There is a wide variety of projects raising funds through an initial coin offering, each hoping to bring something new to the table.

If executed properly, ICOs represent a huge opportunity to bolster distribution and allocation of capital. If not however, investors may not be able to get their money back should anything wrong happen, since an initial coin offering is not officially regulated or registered.

ICOs are not risk-free. As with anything, there will always be some downside when executing this process. Let’s explore the pros and cons of an initial coin offering.        

Pros

Initial Coin Offering process infographic

Accessible to anyone

Any person coming from any place, race, religion, or wealth can raise capital and invest in startups. Still, keep in mind that investing in an initial coin offering is a high-risk move. Anyone can participate in an ICO, provided they get the funds transferred on time.

Bigger profits

Since ICOs are public and anyone can invest in them, the total amount of money raised is likely to be much larger than that of venture capitals, where only a specific number of people are aware of it.

Liquidity

Investors can their trade tokens in a secondary market, rather than have their value confined in equity.  

Trading in secondary markets also allow investors to get real-time pricing based on the progress of a company, as understood by the crowd. This could create better transparency to a private market that has very little disclosure.

Provides opportunities for projects 

Think of ethereum’s achievements. It became the world’s second biggest cryptocurrency, and then offered creators of decentralized applications (DApp) a platform for to put their projects together.

Ethereum, as it appears, is becoming the platform, where the future could be created and it all started because of an initial coin offering.

A “White Paper” is all you need 

Some ventures do not get the chance to be executed because they fail to complete the necessary paperwork.

When a company raises money through initial public offering (IPO), it will have to accomplish several paperwork. However, in some cases, they just do not make it through the whole procedure that will grant them the funds for their project.

On the other hand, participating in an ICO only requires a “white paper”. The white paper will state all the important information about the venture, including financial details. After that, anyone can examine the white paper and decide whether they want to invest in the project.

Community building 

ICOs may also help build a community around a company’s venture. Having a strong community provides a product great credibility.

In addition, the members of that community can state their opinion with regards to what direction the project should be taking and keep the creators responsible.

Raises project’s exposure

The publicity that surrounds an ICO could be significantly beneficial on the exposure of the project. The bigger the exposure, the more people will know about it, therefore raising the number of potential investors.

Early access to valuable tokens 

Some tokens may turn out to be really valuable cryptocurrencies and ICOs could offer the opportunity to invest in these kinds of tokens for a low price.

Gives a reason for innovation 

With ICO’s booming success, many creators now have more reason to innovate and start more potential ventures.

Cons

ico-cons

Scammer alert 

Besides attracting potential investors, ICOs could also catch the interest of several scammers. Given that ICOs only require a white paper and capital can be easily access, scammers can simply construct a fake one and then just take off with a significant amount of money with them.

Some developers might also intentionally leave out particular details from their white paper to make their projects look more interesting than they actually are. However, this comes at a great price. The public could lose their trust in the blockchain technology, which can be potentially harmful to the sector.

Liquidity

Tokens are traded on exchanges that are dark pools. This means that the people being backed in an ICO can simply leave after it is done before any real value comes up, or unload their holdings gradually before the market does, if they have doubts with their business.

Investing in an idea

When investors invest on a venture in an ICO, they are investing in the idea of the venture. It is conceptual idea about something that the creators want to build in the future. Investors read the white paper, and if they believe the group is trustworthy and the project has potential, then they will invest.

Overall, investors do not really have a clear picture of how the venture will progress. They are putting their money where, in some cases, the business models or scopes of projects are vague.

That makes an initial coin offering risky, since nearly nobody can exactly say if the project will be successful or not. A number of startups fail and blockchain projects are no different.

Also, there is always the possibility of a project crumbling into pieces due to hacks, developers not finishing what they started, and price manipulations by whales.

ICO Whales

The biggest whales in the crypto market are not the traders, but ICOs. Having millions of ethereum worth billions of dollars, ICOs are estimated to own more than 3 percent of ethereum’s overall supply.   

When projects decide to cash out due to bill payments, or fear of the market declining further, the outcome of this move can sometimes be severe.

Projects are not required to sell over-the-counter (OTC); rather they use a reliable exchange. All of this weighs on the ethereum on a level much stronger than any other crypto assets have experienced.

Overall, as long as ethereum is the main platform for ICOs, it will largely remain in the possession of hundreds or more projects, each capable to offload the market whenever they want.

Going public is not really that simple

A number of successful companies chose to stay independent and not undergo an IPO. This is because they do not want to do all the heavy paperwork involved in an IPO and due to the reason they may end up becoming short-termist and reactionary, which could hinder improvement.

What a lot of startups do not know about an ICO is that requires a stable investor relations team to regularly speak with the investors and handle community sentiment.

An initial coin offering is different from a standard equity crowdfunding. ICOs are full of speculators, who can or will short you the moment they are able to profit.

Moreover, investing in startups before they make a product-market fit means that pivots are bound to happen. This will then need supportive and skilled investors.

Technical difficulties

The overwhelming activity during ICOs could be extremely straining in the blockchain. Tremendous inflow of cash and too much backlog may cause the network as well as its systems to temporarily break down, leading to failed transactions.

Storing tokens

Tokens made in ethereum can be stored in an ether wallet. Tokens made outside of ethereum though, can be difficult to store. Some owners even end up being unable to store a number of their tokens in any of their crypto-wallets.

Users must also have an official technical experience to get hold of new currency.       

Regulatory oversight

This is where an initial coin offering might meet its end. Given the rising number of scams, significant amount of unregulated cash and lack of protection for investors, governments may choose to legalize ICOs, just like what they did to equity crowdfunding.

Regulatory oversight will surely provide ICOs a long life, but its appeal could be lost in return. Moreover, in exchange for legality, cryptocurrency will lose its ability to remain decentralized and stay out of government control.

In addition, there are no tested legal standards or a clear criterion for an ICO. Traditional methods of certification are also incompatible for a model of a decentralized process.

Still, ICO could be regulated in some way. It does not have to be necessarily done by the government, industry peers can carry it out, so as to reduce sham projects, protect investors, and make ICOs more transparent.

Conclusion

Initial Coin Offerings will continue to be a critical part of cryptocurrency and blockchains. Even with its many and significant contributions, some use the process to fulfill their self-centered needs.

To prevent this, try to be wiser with your actions and do your own research. Read the white papers, discuss with the team involved in the projects participating in the ICOs, and then invest your money.

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