The cryptocurrency market is often referred to as the “wild west of finance”. Cryptocurrencies can sometimes increase in value several times over. Investment opportunities in the form of crowdfunding campaigns are extremely common in the cryptocurrency sphere. These come in the form of ICOs, short for Initial Coin Offering.
Crowdfunding and cryptocurrency is a match made in heaven. Development teams get the funds required to build their ideas into full-blown projects without having to go through all the usual red tape and investors can access a truly global market that is not geographically limited.
Initial Coin Offerings are similar to Initial Public Offers. Development teams issue cryptocurrency tokens that are then sold to the public in exchange for Bitcoin, other cryptocurrencies and national currencies.
The funds gathered by the company/team running the ICO are then used to develop and market the project. The tokens sold during ICOs usually run on an equity, fuel or commodity systems:
- In equity based ICOs, tokens represent a share/ownership (for example in an online casino or a startup) and they usually run on a dividends program that, automatically or otherwise, sends profits from the business to the token holders. They can also run on a buy back program, where the company uses profits to buy back (and destroy) tokens from an exchange in order to lower its supply and create demand. An example of this would be the vSlice or the Darcrus ICOs.
- Some ICOs offer tokens that behave like fuel to the platform that is being developed. In Ethereum, for example, users bought Ether which is required to pay for operation fees within the platform. This creates a value proposition for the token, in which the investor can expect the price to increase if the platform is widely used.
- ICOs can also be used to gather funds for a stable or pegged cryptocurrency, where the funds are used to buy a commodity like gold or silver or even a currency like USD in order to issue the same amount in cryptocurrency tokens, either to be used as a monetary unit for blockchain transactions or a digital store of value. Xaurum and DigixDAO are good examples of this type of ICO.
Over the years, there have been many successful ICOs, including Ethereum, Augur, Stratis and many other. While huge profits can be attained investing in ICOs, so can massive losses. Even more if you’re an entrant user that is not familiar with blockchain technology or how the cryptocurrency community works. In fact, more experienced users take advantage of that fact to produce scam ICOs.
Scam ICOs can in many shapes and sizes but they usually fall within three categories: Money grabbing or No product/Vaporware.
- The first category relates to projects that offer a product that already exists but with a few minor changes. These projects usually ride on popularity waves. For example, when Zcash came out, we saw a bunch of privacy and anonymity related ICOs, some of which with Zero proof technology (like zcash). The team will then provide a product that is nothing more than a clone of another coin or an already-existent piece of technology with a few minor changes.
- The second kind is not as common. The scammer(s) will usually basically gather funds from the community and disappear without releasing a product. An example of this is the DeClouds ICO.
Avoiding scam ICOs can be tricky. While there is no bulltet-proof method to do so, members of the community have compiled some useful information that should help you navigate the world of ICOs:
Of course, there is also material to help you find a promising ICO:
- ICO 2.0 — what is the ideal ICO?
- Investment Guide To ‘Crypto’ Coin Offerings Rating Blockchain Startups
Websites like Smith & Crown and others also provide a great service to the community by vetting projects and providing reports on them. However, they require investors to go with the opinion of one entity.
In the future, investors will also have access to Wings, blockchain-based platform that employs the concept of swarm intelligence to build decentralized forecasting markets that allow Wings community members to analyse the projects and forecast their value. This creates a system where the investor can easily vet projects without the need to trust a central authority that dictates which projects are worthy of investment or not. The analysts in the Wings platform are rewarded with tokens from the ICO according to their accuracy, so they have an incentive to vet projects properly.
For the time being, users should access ICOs carefully with the information available and be careful to avoid scams.