The price of Bitcoin has increased dramatically, from around $1,000 in January of 2017, to over $17,000 in December of that year.
Alternative cryptocurrencies like Ether, Ripple and Litecoin have followed suit, leading to a surge in interest around Initial Coin Offerings (ICOs).
What’s an ICO all about?
What is an Initial Coin Offering (ICO)?
An ICO is an unregulated way to raise capital for a start-up cryptocurrency venture, similar to crowdfunding.
The fact that ICO backers do not donate funds and expect a return on their investment.
It is used to bypass the rigorous and regulated fund raising process imposed by banks and venture capitalists.
ICOs are similar to Initial Public Offerings (IPOs) that are issued by new companies to raise capital in return for shares.
The difference is that an ICO uses tokens, or virtual coins, instead of shares in exchange for capital.
In ICO campaigns, a portion of the cryptocurrency is sold to backers of a project in exchange for traditional currency or an established cryptocurrency, usually Bitcoin.
In order to launch a campaign, a company creates a white paper outlining the scope of the project, how much capital is needed for the venture, the type of currency accepted, and the duration of the ICO campaign.
While IPOs deal with investors, ICOs encourage funding from supporters of the start-up’s venture.
Risks Associated With ICOs
ICOs are inherently risky because they are not regulated, making them vulnerable to fraud.
Scammers offering an ICO will attempt to drive the price of the cryptocurrency up to a particular point, at which they will sell their entire interest.
This will lead to backers who hold coins from ICO seeing a dramatic decrease in value, with a subsequent loss in investment.