Much like IPO stands for Initial Public Offering in which investors purchase shares of a company, ICO is Initial Coin Offering. These three words have had tongues wagging in a frenzy in the recent past. ICO is a means of crowd-funding centered around cryptocurrency. Many startup companies are now using it as a source of capital.
The earliest ICOs first happened in 2013 with Ripple Labs creating a token to fund the development of the Ripple platform. In 2014 Ethereum raised USD 18 million which is no small feat by the standards of the time.
In ICOs, the quantity of the crowdfunded cryptocurrency is sold to investors in form of “tokens”, in exchange for legal tender or other cryptocurrencies such as bitcoin or ethereum. These tokens supposedly become functional units of currency if or when the ICO’s funding goal is met and the project launches.
This way, startups avoid costs of regulatory compliance and intermediaries, such as venture capitalists, bank and stock exchanges, while increasing risk for investors. Which is where the challenge comes in: ICOs may fall outside existing regulations relative to the nature of the project at hand. There is so much controversy surrounding them, that they are banned altogether in some countries, such as China and South Korea. Technology giants such as Facebook, Twitter and Google have also banned the advertisement of ICOs on their platforms.
Several startup companies have raised obscene amounts of money from ICOs notably among them, Nigerian startups Fyodor, MailHaven and Mobile Forms as part of 22X: which stands for Batch 22 of the 500 Startups accelerator programme selected in August of 2017, raising a combined funding north of USD 22 million in the ICO. South Africa’s ProsperiProp raised US$200,000 via its ICO; SureRemit, a non-cash remittance platform raised $7 million on the initial coin offering (‘ICO’) market. Other names that have been successful are Bitpesa, Belfric Global, Wala, amongst a good many others.
So the question isn’t whether this tactic works, because as demonstrated above, it works rather too well, the question is whether this is a precious gem or a ticking time bomb and all these people are delusional. As with all matters financial, prediction of risk is increasingly difficult, we would have to wait for years before we can know for sure. In the mean time, let’s focus on what we can control.
Why is there so much controversy surrounding the ICO, what are its downsides
Whilst ICOs are used for legal activities such as corporate finance and charitable fundraising, since there is no formal process to audit ICO organizations they can relatively easily be used for fraud. The U.S. Securities and Exchange Commission (SEC) warned investors to beware of scammers using ICOs to execute “pump and dump” schemes, in which the scammer talks up the value of an ICO in order to generate interest and drive up the value of the coins, and then quickly “dumps” the coins for a profit. The developers themselves can be guilty of such tactics.
Jordan Belfort, whom you probably know as “The wolf of wallstreet”, reiterated the SECs warnings. In a statement to the Financial Times he says, “It is the biggest scam ever, such a huge gigantic scam that’s going to blow up in so many people’s faces. It’s far worse than anything I was ever doing.Promoters [of ICOs] are perpetuating a massive scam of the highest order on everyone,” Belfort said. “Probably 85% of people out there don’t have bad intentions, but the problem is, if five or 10 percent are trying to scam you, it’s a fucking disaster.” He however claims that whilst ICOs may not necessarily be a bad thing, the 10% that are scammers make the entire system a risky endeavor, he concludes, “Everyone and their grandmother wants to jump in right now. I’m not saying there’s something wrong with the idea of cryptocurrencies, or even tulip bulbs. It’s the people who will then get involved and bastardize the idea.”
What are some of the plus sides of an ICO
It is a quick and easy fundraising mechanism; it raises vast sums of money and the company does not have to give away any equity in the business, which is why founders quickly warmed up to it.
Marketing is primarily done online. The tokens can be marketed over the internet to a large, general audience, through various social media, online forums and the companies website.
The potential for gains is very high. These cryptocurrencies are likely to appreciate in price very quickly, (think of Bitcoin which hit $20,000 in value before nosediving), securing a very handsome return for the investor.
They are accessible to the general public.
What questions should one ask while evaluating an ICO
Naturally, with all these concerns popping up around the subject of ICOs, anyone intending to participate in an ICO should know, as explained by Bitsoko COO Frank Deya, “For an investor to identify a legitimate and feasible project a number of things that should
be carefully scrutinized:
a. Blockchain cannot be applied on everything
Many projects have been riding on the blockchain and decentralization wave, with a claim
of bringing ‘disruption’ in a particular sector. They simply utilize the hype around
blockchain to lure would be investors. It’s important to have a basic understanding of the
technology and question the applicability in the project.
b. Team Composition
The most important element in a project is the team. Therefore, if the people behind the
venture are anonymous or inexperienced in the field it should raise a red flag. Adequate
due diligence should be carried on the individuals behind the project with thorough profile checks on their backgrounds, including social media accounts.
c. Details on the website and white paper
Insufficient information on the website or whitepaper should be a cause for alarm. As an
investor, one should probe further for sufficient information about the project in its’
entirety. It’s better to avoid a project one is unsure of than to risk losing your funds in a sketchy venture.
d. Project roadmap
ICO’s ideally must provide elaborate development timelines that indicate the long term
plan for the project. Updates are periodically broadcasted through dedicated slack or
telegram channels. The lack of a roadmap is a warning sign on the legitimacy of a
project. At the same time, scammers can draft a roadmap and offer updates to the
public but this does not legitimize their ill intentions.
Emphasis should be put on conducting due diligence in order to avoid falling victim to
a scam or investing in a project that is not feasible.”