The year 2017 has been given an unofficial status - "The year of cryptocurrencies and ICO". Both of them demonstrated a staggering growth of capitalization. Popularity of cryptocurrencies and ICO projects has become a global phenomenon. It has seduced investors to recoup shortly their investments in hundreds or thousands times or at least to gain an exclusive access to latest technologies and developments promoted by ICO projects.
Further we will briefly speak about essence of ICO in simple words…
ICO stands for “Initial Coin Offering”, namely initial placement of coins. "Coins" are special type of cryptocurrency - tokens, which ICO participants buy with further investment in ICO project. You can easily get tokens for free within framework of so-called “bounty programs” by performing some useful actions for project founders, for example, support in media, social networks or creating software for project.
Apart from “ICO” abbreviation there are other concepts to define raising funds with cryptocurrency tokens, such as crowdsale (mass sale), cryptocurrency crowdinvesting or crypto currency crowdfunding. The base of all these concepts is a word “crowd” - a crowd that indicates availability of this type of investment for all, and not just for professional financiers.
As a rule ICOs are held to raise funds for project’s development at early stages. In bona fide projects raised funds are used for development. Generally, distribution of investments are indicated in ICO’s documentation (white paper and roadmap). Investments are used to create final version of product, its debugging, PR campaigns and marketing.
So basically an ICO is one of options to attract investments, the same as to issue shares or bonds. But ICO’s cryptocurrency basis allows to organize a wide fund raising in a very short time and with minimal costs.
Similarities and differences between ICO, IPO and crowdfunding
IPO (Initial Public Offering) stands for an initial public offering of shares on exchange, one of traditional ways to attract investments. ICO can function on similar principle - by purchasing tokens investors receive a share in a project, company and its revenues. But this model of liability is rarely used in an ICO.
There are more distinctions than common features between ICO and IPO. IPO is available mainly for mature and successful companies, which want to receive additional financial injections. ICO is more often held at a stage when there is still no final product and revenues from it, so namely on a stage of idea. In this sense an ICO is similar to crowdfunding.
In almost all countries IPOs are regulated by financial legislation, which makes this procedure complicated and expensive, but provides financial guarantees to its investors. In the case of ICO and crowdfunding, there are no legislative restrictions. This simplifies and speeds up process of fundraising, but at the same time investors are not protected.
At present there is no legislative regulation of ICOs in any country of the world. Although many developed countries such as United States are already taking their first steps in this direction. Therefore, an ICO can’t be called a legal or illegal procedure because legal basis simply doesn’t exist yet. That is why each investor and private user act at his own risk when investing in an ICO.
Nevertheless, market interest towards ICOs both from investors, private individuals and large investment funds and banks is enormous.
Reasons for such a great interest in an ICO market can be divided into two groups. First consists of a of people who are interested in high-tech sector, participation and development of exciting projects, being a part of a new community and ecosystem. Earlier this group of investors has participated actively in crowdfunding of various gadgets promoted on platforms like “kickstarter”. ICO offers to take part in development of much greater projects – from innovative distributed storage systems development to creation of own payment systems, independent from governments and banks.
Second, and perhaps the main reason for a great interest in ICO is incredible profitability of a number of ICO projects. A successful investment in crowdsale can bring profits by several orders of magnitude greater than financial instruments like stocks or futures. A classic example is an ICO of Ethereum. In summer 2014 during pre-sale it’s tokens cost was less than one cent, and today their price has risen almost up to $ 700!
As of today ICO’s investors operate at their own risk and their investments are not protected, moreover they are guaranteed only by such virtual concepts as decency and reputation of project’s founders. The biggest ICO’s risk - scammers, who are raising funds not for project development, but for self-enrichment.
It should also be borne in mind that percentage of crowdsales which have recouped investments is always rather small. Most ICO projects close due to a failure to fulfil stated ideas and plans for various reasons. In case with bona fide projects, you can count on return of investments or at least of their unspent part. In order to mark precisely qualitative and bona fide ICOs out of total mass, it’s necessary to analyse all available information about project and its founders.
What to pay attention to when learning about an ICO first?
Most ICO-projects publish documentation, which outlines financial relationship’s procedures between investors and founders of the project. All such documents as Token Sale Agreement, Token Sale Conditions, Disclaimer of Warranties, Limitation of Liability, White paper, Roadmap should be carefully examined. In such way you guarantee yourself a clear understanding of rights that you receive when purchasing tokens of this ICO.
Participants and founder’s reputation of an ICO are also a very important factor. If there is nothing known about project’s founders or published information about them contains signs of fraud this is an alarm signal for investors.
A good rule is to invest in projects whose economic viability you can evaluate basing on your experience and knowledge in this field. Many rather bona fide ICOs fail for technical, economic or organizational reasons.
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