What is ICO?

ICO is a recently introduced concept of crowdfunding projects in the industry of Cryptocurrency and Blockchain.

ICO means "Initial coin offering". This event, sometimes called "crowdsdale", implies the company's release of its own crypto currency for financing purposes. Usually a certain amount of crypto-tokens is released, and then they are sold to the target audience of the project.

As a result, the company receives capital to finance product development, and participants receive their shares with cryptographic tokens. In addition, they fully own these shares.

First ICO

The first project that ever launched the ICO was Mastercoin. In 2013, he managed to get $5 million in bitcoins, selling his tokens. Many other companies followed suit, for example, Ethereum in 2014, or Waves in 2016, receiving more than $18 million and $16 million, respectively.

Initial coin offering is a proven and effective way of launching crypto projects, if the product is in demand and a solid team is working on it.

How does ICO differ from an IPO?

There are some parallels between the concepts of the Initial public offering (IPO) and the ICO. However, there are several key differences.

First, the company's shares issued during the IPO always indicate the share of ownership in the relevant company. By default, crypto-tokens are not used here, which are sold to the public under ICO. Tokens can be used to transfer voice powers in some projects, but more often, they are currency units that you can send to other users and exchange for other cryptocurrencies.

Secondly, IPOs are largely regulated by the government. This requires the company-participant to prepare a large number of documents before the issuance of its shares. This also implies serious consequences in case of non-compliance. Conversely, cryptocurrency crowdfunding is a new area largely unaffected by government regulation. In fact, any project can run ICO at any time without special preparation, and anyone can take part in it and contribute their money no matter what country it is in. This liberal environment carries both new opportunities and risks in comparison with more conservative IPOs.

The value of crypto-tokens

The value of the tokens depends on the particular project; sometimes they can have some additional functions. A good example is Storjcoin. These crypto-tokens were released by Storj.io during their ICO.

Storj.io is a decentralized cloud store startup. With the release of its core product, users have the opportunity to spend Storjcoin to acquire a place in the cloud storage, in addition to simply trading them, like any other coin.

Another outstanding example is Ethereum, a platform for creating decentralized applications of all kinds. The company's tokens, called Ether, are actively used to support the work of applications that have already been built on the platform.

Why participate in ICO?

There are many advantages of participating in the ICO. An obvious factor is helping the project launch the product. In addition, there is an opportunity to profit from the sale of tokens after their purchase, especially if the project proved useful, and the cost of the tokens began to grow.

In most cases, crypto-tokens issued during the ICO are sold at a fixed price expressed in BTC or in dollars. This price is not supported by anything other than the community's belief in the development team that will release the finished product in the future – so the price is usually quite low. After the project is developed and launched, the cost of the tokens will be provided with a real working product. This usually leads to an increase in value. When this happens, the original proponents of the project will be able to sell their tokens at a significant price.

For example, during the ICO Ethereum in 2014, tokens were sold at a price of 0.3 to 0.4 dollars per unit. After the launch of the main project platform in July 2015, the price of each token instantly reached $19.42. This shows that some of the most fortunate participants were able to gain a gain of more than 6000%.

However, one must bear in mind that profits are not guaranteed. The ICO campaign may fail, in which case all contributions will be returned. Even if it succeeds, there is a possibility that the developers will not be able to provide the final product, and the price of the tokens will never increase. All ICO participants should consider this risk when they decide to contribute to any company.

Guarantees

The government (depending on the country) practically does not give any guarantees that the owners of the project will not disappear with your money. Nevertheless, to date, most companies that have started their ICO, impose the same restrictions to ensure sufficient confidence and transparency for depositors.

The very first ICOs were the most part improvised with rather small rules and restrictions. But soon the owners of Blockchain-startups realized that without government regulations they are obliged to establish conditions that will provide sufficient confidence from the community and, accordingly, sufficient inflow of investments.

This led to a number of self-restraints, and here are some of them:

·      Preservation of the funds invested by community members in the escrow wallets. To access the funds stored in this wallet, the owners need a few private keys. One of the keys usually belongs to a trusted third party, not involved in the development of the project

·      Establishing a legal entity for the company and documenting a number of ICO terms and conditions

How to identify fraudulent ICO?

There are several signs of a potential ICO fraud: anonymous developers, lack of a purse with escrow, and vague or unrealistic goals.

Over the past few years, the crypto community has had to face a number of fraudulent ICO campaigns. There are several distinctive features that are common to most similar campaigns, discovering which you can avoid losing your money in vain:

·      The developers of the project are either anonymous or unknown to anyone in the community. If the people behind the ICO do not put their reputation on the line, they are more likely to feel safe when the fraud is discovered

·      There is no wallet for escrow. If all the keys to the depositors' donations are concentrated in the hands of the project owners, nothing prevents them from hiding with the money

·      Unrealistic / unclear goals. When a project does not have a clear, realistic roadmap, it means that the people behind it do not at best know what they are doing at all. In the worst case, they do not care, because in fact they do nothing at all

·      Lack of transparency. Today, the demonstration of the production process of your project for the audience is considered an industry standard in the crypto industry. If developers do not release code snippets, beta or demo versions of their product, video behind the scenes of the project, or other types of progress reports, they may simply have nothing to show

If you come across an ICO whose campaign displays any of the above signs, and especially any combination thereof, it is better not to deposit your money there. Be careful when choosing goals for your investment.