What Is Initial Coin Offering (ICO)? FAQS, Advantages & Disadvantages

Even now that the dust surrounding it settled down a bit and Initial Coin Offering (ICO) funding has become a part of our everyday lexicon, digital crowdfunding is still something that scares most businesses away –especially those with particular niches that have nothing to do with the exciting world of cryptocurrency exchanges and blockchain.

This sparks a fairly justified question: Why? ICOs have proven their worth on a plethora of occasions, and there seems to be a general consensus that initial coin offerings carry about the same level of investment risk as venture capital. Investors constantly keep an eye out to watch the ICO space closely for the next big opportunity that comes closest to the most successful ICOs. 

So, why is there so much skepticism? Why are businesses so reluctant to dive into ICO waters, despite the long list of benefits they offer, like being able to build up an audience before launching a product or receiving precious user directions while creating it?

We will discuss if the current reputation surrounding initial coin offerings is well warranted and if businesses reluctant to invest or launch an ICO should reconsider their points of view. Furthermore, we'll try to answer a fairly convoluted question: Are we currently at the end of fundraising via ICOs, or is this just the beginning of a healthy market?

FAQs on ICOs

Before we can dive into whether ICOs have a sustainable future and whether businesses should rely on them, we first need to make sure we're on the same page about what initial coin offerings are. With that goal in mind, let's cover the most frequently asked questions about ICOs and cryptocurrencies:

• What is ICO, and how does it work? ICOs are a form of cryptocurrency used by businesses to raise capital. It is a means of crowdfunding by creating and selling a digital token. Through ICO trading, investors receive unique cryptocurrency “tokens” in exchange for their monetary investment in the business. 
• What is ICO funding? ICO funding is a method of fundraising via an initial coin offering, which is a digital crowdfund that, instead of fiat currency, collects Bitcoin or Ethereum.
• What is ICO marketing? ICO marketing is a service provided primarily by digital marketing agencies that aim to develop a strategy for promoting an ICO-based project and fundraising.
• What is a Bitcoin token? Cryptocurrency is the superset, while altcoins and crypto tokens are its two subset categories. A bitcoin is nothing but a crypto token because — technically — all crypto assets can also be described as tokens.
• What is an ICO token? An ICO token is what you receive when you invest in an ICO – a cryptocurrency that has no current value but will be worth something within the project's system once it's launched – if the ICO turns out to be successful, that is.
• What is ICO crypto? An ICO crypto is the currency projected to have value once the project exits its pre-launch phase. Until that moment comes, ICO crypto exists in the form of a token.
• What is ICO investment? An ICO investment is what startups use to bypass the rigorous and strictly-regulated capital-raising process required by venture capitalists or banks.
• What is the Ethereum network? Ethereum is a decentralized blockchain platform that establishes a peer-to-peer network that can securely execute and verify application code. These application codes are called smart contracts, which allow participants to transact without a central authority. Transaction records can be verified and securely distributed across the network. It gives participants full ownership and visibility into transaction data. 
• What is the ICO market? The ICO market is the current state of things in the ICO field, which carries its standards, prices, and rules.
• What is the difference between an IPO and ICO? Initial Coin Offering (ICO) and Initial Public Offering (IPO) raise your business funds. While more established businesses use IPOs, ICOs are preferred by young startups. While ICOs are unregulated, IPOs are supervised. The transaction in IPOs occurs through fiat currency, while ICOs use tokens. 
• Is Bitcoin a token? No, Bitcoin is a full-blown, totally functional cryptocurrency.
• What is an altcoin? An altcoin is any digital cryptocurrency similar to Bitcoin. The term stands for an alternative to Bitcoin and describes any crypto that uses the same fundamental building blocks as Bitcoin.

Why businesses stay clear of ICOs

Since the ICO concept was first mooted, there have been concerns over its legality. A big part of why businesses are still wary of ICOs is because this form of raising funds is banned in some countries. After all, there's no sugarcoating the fact that ICOs and cryptocurrencies exist in a legal grey area and, thus, bear several risks for anyone who decides to participate in them. 

Furthermore, anyone can invest in an ICO, even anonymously, which opens up a lot of room for fraud of various kinds. This leads us to why regulators increasingly warn investors to be wary of ICOs. There is no official guarantee or promise whatsoever on what the ICO-orchestrating teams will do with the invested funds they receive. In other words, if an ICO fails to deliver on its promise for whatever reason, there is no real penalty for doing so. 

They can simply pack up all the ICO funds they received and disappear off the grid – which is why many countries have opted not to regulate ICOs or ban them altogether. Countries that allow them to do next to nothing to ensure they run smoothly and safely. Obviously, this presents a hindrance for businesses that, while able to see the advantages of such a fundraising concept, do not feel comfortable with risking assets in a legally-shady environment that has no guarantees past spoken promises.

While there's no going around the fact that ICOs have more than a few shortcomings in their security department, the truth is that a lot, if not all, of these problems can be solved with carefully implemented regulations. And, as long as these regulations don't stand in the way of significant projects, everything else should fall into place. This will also be the determining factor for businesses, as safety is a primary concern whenever large amounts of money are involved.

How regulatory bodies responded to ICOs 

While the early phases of ICO crowdfunding were a honeymoon in many ways, regulators worldwide have turned their attention to ICOs in recent years. A growing number of them either took or are taking action, scrambling to develop new rules on ICOs, motivated mainly by making digital fundraising more secure and taxable. 

For example, the U.S. Securities and Exchange Commission (SEC) made strides toward strengthening its ICO rules. At the same time, regulators in other countries, such as Singapore, Hong Kong, and Russia, warn that digital currencies are unsafe investments and are working hard to find the best way to protect investors.

While some are trying to find a compromise of some kind, countries like China have chosen to ban ICOs, declaring them and cryptos a threat to financial stability. There are valid cases to be made that ICOs can disrupt the economy. After all, there has never been a similar option of raising incredible sums of money like the one offered by ICOs, and there's no telling what effects they could have if they ever became legal in their current form. So, how did China's market react to the ban on ICOs? Obviously, this brought about a massive collapse in the ICO market value. 

On the other side, in the U.S., increased regulation had a much tamer of effect on the ICO market. The price, for instance, of the Ethereum fell about 10 percent in one day after the SEC's announcement. Of course, the SEC's stance also had a chilling effect on the creation of new ICOs in the U.S., putting several planned offerings on hold. This is usually the argument you'll hear from people who do not feel like regulating ICOs is the most productive course of action.

Are ICOs a valid investment option?

It's hardly a surprise that the regulation of ICOs came into play at some point. There was no way that the industry could keep on developing without starting to brush shoulders with regulatory bodies.

However, there's a growing concern that these regulatory interventions may change the landscape for ICOs in a fashion that completely takes away the field's identity. We are still determining if regulatory bodies can implement sufficient rules without compromising what made ICOs great in the first place.

This will have a massive say in whether businesses start to see ICOs as a worthwhile funding method they can consistently rely upon. If regulations can both protect investors and not tie the hands of ICOs, there's no reason we should not expect businesses of all kinds to start lining up to either invest in or launch an ICO.

Advantages of ICOs

With the potential for massive returns from investors, ICOs can turn out to be a perfect crowdfunding technique. Initial coin offerings have ample benefits:

• If you can determine the right investment, it has the potential to offer high profits. 
• Prices are often low because you are purchasing early. Some also offer tokens at discounted rates.
• If interested, a company can quickly launch an ICO as online services easily facilitate the generation of cryptocurrency tokens.
• Unlike some IPOs, there aren't any restrictions on who can invest. Anyone can access them. 
• It's a quick and efficient way for start-ups to raise funds.

Disadvantages of ICOs

To reduce risk, you must thoroughly research before investing in an ICO. Despite the various benefits of investing in ICOs, there are also disadvantages of ICOs that you should be aware of:

• Cryptocurrency projects are very often volatile, so there is a significant risk of a token losing its value or failing.
• Financial authorities do not regulate ICOs. Due to this, many scams and mediocre projects exist in the market. Finding the right IPO among many can be challenging. 
• Due to the lack of regulation, the investor might never recover the funds lost due to fraud.
• It usually takes experience and knowledge of crypto wallets to invest in ICOs. Beginners often turn to cryptocurrency stocks or publicly traded coins.

Caution is an effective strategy

In order to make a ruling on whether ICOs are worth the effort of implementing regulations or not, you need to understand perfectly how this kind of fundraising works and what the true ICO meaning really is. The same is the case if you want to start investing.  Investors are drawn to ICOs for the dream of buying in early to a successful cryptocurrency. Although this is possible, it takes considerable research and time to sort through the vast numbers of upcoming ICOs. Considering the risk involved, it's best to approach with caution.

Ready to learn more about cryptocurrency? Start by gaining a deeper understanding of the major types of cryptocurrency and their benefits.

This article was originally published in 2019. It has been updated with new information and examples.