An ICO, or “initial coin offering,” is a form of fundraising that was commonly used for raising capital for cryptocurrency projects in their early stages. This process involved the blockchain-based startup creating its own digital token and selling it to investors in return for other cryptocurrencies like bitcoin or ether.
Through ICOs, which are a form of digital fundraising, startups have the opportunity to obtain funds without relinquishing any ownership and also to develop a group of motivated users who desire the project’s success in order for their tokens bought prior to sale to increase in worth.
Initial Coin Offerings (ICOs) provide startups with a simple way to acquire funds and a novel method of doing so, but purchasers may also gain from access to the service that the token provides in addition to an increase in the value of the token if the platform succeeds (a major caveat!).
Gains can be unlocked by trading the tokens on an exchange after they have been listed. Alternatively, purchasers may opt to increase their stake in the project by buying more of the tokens when they become available on the market.
Ethereum’s initial coin offering (ICO) in 2014 was one of the earliest success stories using this novel fundraising strategy, earning $15.5 million. Fifty million ETH tokens were sold at a price of $0.311 each, and on May 12th 2021 it achieved a peak of $4,382.73, giving investors an incredible ROI of 1,408,903%.
This has made Ethereum not only one of the most highly valued digital currencies but also enabled the growth and development of decentralized applications (dapps) based on its technology.
Alexis Ohanian, co-founder of the social media website Reddit, is said to have purchased 50,000 Ethereum for only $15,000 during its ICO in 2014. That’s to say, each coin cost him just 30 cents.
ICO History
In 2013, J.R. Willet, a software engineer, composed a paper titled “The Second Bitcoin White Paper” for the token MasterCoin (which was later referred to as Omni Layer) and was able to generate $600,000 in funds.
By 2014, seven projects had raised an aggregate of $30 million with Ethereum being the most successful; 50 million ether were issued and sold to the public which earned more than $18 million.
In comparison, 2015 saw fewer sales with seven raising only $9 million with Augur receiving just over $5 million being the most successful.
In 2016, activity saw a surge when 43 ICOs, like Waves, Iconomi, Golem, and Lisk, brought in $256 million. This included the well-known sale of The DAO project – a decentralized investment fund that wanted to support the Ethereum environment by allowing stakeholders to decide which projects got funded. Unfortunately, shortly after its record-breaking $150 million sale was completed, an attacker stole around $60 million worth of ether from it causing the project’s downfall and requiring a modification of the Ethereum protocol.
Despite the DAO’s failure, enthusiasm for digital assets continued to grow exuberantly and in December, the first investment fund devoted to tokens was heavily funded by traditional venture capitalists.
In 2017, ICOs hit a new high point due in part to advances in technology. A total of 342 token sales raised close to $5.4 billion, making it a major force driving blockchain development. As ICOs sold out more quickly every time, people were eager to join the trend without considering the project’s fundamentals carefully.
Legal authorities Begin to exam ICOs
The surge in popularity of token sales brought about an increase in oversight, leading to questions about their legality. In 2017, the US Securities and Exchange Commission (SEC) cautioned that any digital asset offered to American investors which possessed the qualities of a security – such as ownership rights, revenue generation or potential for profit from another’s efforts – had to comply with US securities regulations or face consequences. More recently, SEC Chairman Gary Gensler declared he believes all ICOs fall under the definition of securities and thus violate United States securities laws – suggesting more legal action may be coming.
Financial regulators from Australia, the U. K and many other nations cautioned retail investors about the dangers of taking part in these possibly fraudulent offerings.
South Korea and China took decisive action by completely prohibiting ICOs around the same time, while Thailand issued a provisional ban on token offerings a year later as regulators were in the process of creating new laws.
Despite the general apprehension of regulators concerning ICOs, there is still no worldwide agreement to pass universal legislation – or alter current ones – to safeguard investors from weak or deceptive token sales.
Risks in Investing ICOs
Investing in a token from an ICO can be risky. The market is not well regulated, there are many scams, and those who invest have no recourse if the ICO does not go as expected or turns out to be fraudulent. A report done by Satis for Bloomberg in 2018 declared that almost 80% of the existing ICOs at that time were thought to be illegitimate sales.
Anyone looking to join an ICO should make sure to do their research, including the following steps:
- Evaluate the project’s personnel to determine if they possess a track record of forming thriving enterprises. It is best if team members provide their social media profiles so they can be reached.
- Examine the project’s proposal and timeline to observe how the proposed product or service will function, including when certain components will be available.
- Verify if any software code has been scrutinized by an independent source. This will be a sign that the project is taking its security seriously.
- Check for spelling and grammar mistakes on the website – this could be a sign that the website was created hastily without much consideration, which might mean it is fraudulent.
Tokens that have had successful sales are generally featured on cryptocurrency exchanges, allowing latecomers to the offering to buy the coins. If a project has done a good job of promoting itself, there can be considerable interest in its token after the ICO.
It has become the norm for ICO investors to sell their discounted tokens to make a fast profit or manipulate the prices. This is why very few tokens recover in value after these releases, which has led to a decrease in ICOs today.
As per a 2018 study, more than half of all ICOs did not last past four months after launch. Here is a list of over 2,400 unsuccessful ICOs and “dead coins.”
