What is ICO?
ICO burst into the spotlight in 2017 as a means of funding blockchain-based projects; they are similar to IPO, which is the standard method of funding new enterprises via selling shares of stock.
ICOs sell the project ‘coin’ (alternative term: token), which can be used once the project is functional for various purposes.
For both IPO and ICO, the startup side carries out business development using funds raised and investments grow with the company. Investors purchase options early with the belief that the company will grow and, with it, their profits.
In the case of IPO, shareholders have voting rights and access to dividends, however, voting must take place at a shareholders’ meeting. In the case of ICO, voting takes place virtually so attendance is not necessary. Furthermore, dividends are allotted automatically, usually through Smart Contracts.
IPOs require enterprises to conform to standards such as security protocols, ISO, and audits. ICO did not have such standards (although this is changing). Although the overhead is lower for startup and they can theoretically use those funds for development, the risk for investors is much more substantial than conventional IPO.
What is a Token?
A token is a virtual currency issued by a company or project.
As mentioned above, IPO issue shares, whereas ICO issue tokens. Tokens can be purchased on associated cryptocurrency exchanges and give holders access to various rights and services.
ICO: High Risk/High Reward
IPO investments are subject to market fluctuations and there are cases of where stock prices fail to stand up to investors’ expectations. Investors can show their confidence (or lack thereof) in a project’s potential by choosing to buy, hold, or sell shares.
Due to the fact that virtually anybody can purchase tokens, ICO offer investors potentially unheard of profit margins; yet they are still largely unregulated. As such, scam projects – developers creating a project, running an ICO, and disappearing with the amassed funds – are not unheard of.
There are many ICO projects whose prices have more than doubled since the ICO period, Investors have noticed this, but so have others whose main goal is to turn a quick buck.
Until regulatory standards are in place, investors need to be wary of projects that fail to provide or abide by project roadmaps or have notable token price stagnation/collapse.
Just as in IPO, investors should investigate how the funds raised will be used to help the project develop. Our advice? Keep a cool head and don’t get caught up in the hype surrounding ICO investment.
ICO offer many of the same benefits as IPO, with the added bonus of being widely accessible to individuals of any tax bracket. With that in mind, ICO remain largely unregulated, so investors must rely on their own discretion to determine whether a project is legitimate or a scam.