The Benefits and Risks of Initial Coin Offerings

Since January of this year, startups throughout the world have managed to raise over US$1.8 billion through Initial Coin Offerings (ICOs). ICOs, also referred to as token sales, are crowdfunding campaigns whereby companies sell digital tokens in order to obtain capital which will purportedly be used to fund business operations, software development, further investment and other initiatives as the company sees fit.

Their rising popularity has made ICOs quite important for startups wishing to raise funds without needing to seek out venture capitalists, host Initial Public Offerings, or get listed on a stock exchange. However, there are certain benefits and risks associated with these crowdfunding campaigns, and this article will cover the most important ones.

The Benefits of ICOs

1. A quick, easy and efficient fundraising opportunity

Just about anyone can set up an ICO, as customized token sales can be achieved through numerous platforms, including Ethereum. The costs associated with marketing ICOs and the contribution settlement are considerably lower than some of the other popular mechanisms used for fundraising. Not only that, but hosting an ICO is bound to consume less time.

2. They can strengthen decentralized applications

One of the main characteristics of decentralized applications is that the more users they have, the better their experience is. Therefore, by conducting an ICO, companies will surely see a massive increase in their user base, thereby sustaining the operation of the network or application in question.

3. Easy Marketing

With online marketing, the sky’s the limit. Therefore, tokens and ICOs can be marketed to a large, targeted audience with little effort. Potential investors can, therefore, find out about a particular ICO through online ads, the company’s website, social media, and more.

The Disadvantages of ICOs

1. No formal process to audit ICOs

Due to a lack of regulation, it often happens that companies choose to conduct ICOs right after finishing up their whitepapers while being unsure as to whether their projects are truly buildable. What’s more, companies conducting ICOs are also not legally required to release any information on their latest developments. Therefore, there is always the risk that projects are abandoned, underperform, or fail to get off the ground in the first place.

2. Volatility and uncertainty surrounding token price

Oftentimes, a token price is calculated on the basis of possible resale profits, rather than fundamental value or economic utility in the market. Because of this, Ponzi schemes can be easily developed and token prices may see unfair adjustments meant to increase profits.

Clearly, it is important to carefully conduct one’s own research and decide for oneself whether a given company and its associated ICO are trustworthy prior to investing. However, if successful, an ICO investment can be a quick way to yield a large profit for an investor.