The wave of cryptocurrencies also brought with a new method of crowdfunding: the Initial Coin Offering, or ICO.
For a while, it seemed like everyone was about to have an ICO. Companies only had to mention that they were going to either invest in blockchain technology or hold an ICO, and their stock would soar—regardless of truth.
So, what is an ICO? Is it still possible to make money investing in one?
What Is an ICO?
The term Initial Coin Offering refers to the act of crowdfunding using cryptocurrencies. The first major ICO was for the cryptocurrency and smart contract platform, Ethereum.
Ethereum’s development was funded by the issuing of Ether, the value token of the Ethereum network. The developers exchanged bitcoin for Ether, allowing investors to contribute over $18 million to the then-burgeoning Ethereum project.
The funds raised by the Ethereum project allowed the development of the Ethereum Virtual Machine (EVM). The EVM is a core part of the Ethereum platform, allowing anyone to develop applications or smart contracts. Ethereum quickly became the platform of choice for ICOs. An ICO allows anyone to crowdfund a new project, without third-party involvement. All that you need to set up an Ethereum ICO is a new smart contract, and a set number of tokens, with their price pegged against Ethereum or bitcoin.
As these ICOs issue tokens as a digital alternative to shares, they are sometimes referred to as token sales. However, the terminology is applied loosely, with ICO and token sale often used interchangeably.
IPO vs. ICO
You may have come across the term Initial Public Offering (IPO) before. This is where a company “goes public” by issuing shares to investors in the hopes of raising funds. There have been some notable tech IPOs in recent years including social networks Facebook, and Snap, along with e-commerce giant Alibaba.
In most instances, the company undergoing an IPO is already operating with a marketable and active product before going public. ICOs often receive comparisons with IPOs, but there are some fundamental differences:
- ICOs are currently unregulated
- ICOs don’t require a viable product to launch; you’re buying into an idea
- An ICO is more akin to crowdfunding than an IPO
- An IPO is a lengthy procedure; an ICO can finish within weeks
- ICOs are marketed at anyone whereas IPOs usually target institutional investors
The biggest difference of all is the level of risk. ICOs are inherently riskier than IPOs. Of course, every investment carries an element of risk. However, an IPO carries the weight of regulation and law, while ICOs are very much still the wild-west of investments.
The Recent Explosion of ICOs
In 2017, there were over 400 ICOs. Those projects raised over $6.5 billion between them. The funding disparity between the early and later months of 2017 is clear, too. The 37 ICOs launching between January and April of 2017 raised $205 million, for an average of about $5.5 million each. The 287 ICOs between September and December 2017 raised $4.4 billion, for an average of about $15.6 million each. By late 2017, awareness of cryptocurrencies and the potential returns on an ICO were through the roof, and the massive increasing in funding illustrates that perfectly.
But, enough about 2017. What happened in 2018?
The ICO boom, well, it kept booming.
At the time of writing, in December 2018, a total of 983 ICOs had raised a combined $20 billion. That’s impressive, right? Yes and no. There are two important things to consider. One is that two ICOs accounted for over twenty percent of that figure. The enormous EOS ICO raised around $4.1 billion alone, while encrypted messaging app Telegram’s ICO raised $1.7 billion. Furthermore, the total average funding for all 2018 ICOs was roughly $20.6 million.
Even though the value of the major cryptocurrencies has been negatively volatile and the risks of cryptocurrencies confirmed (multiple times over), investors still consider the potential returns on an ICO worth the risky investment.
Are ICOs Scams?
Unfortunately for the cryptocurrency world, some ICOs are scams. The surge of ICOs throughout 2017 and 2018 undoubtedly attracted some of the shadier people of the world. There are some massive examples of ICO scams:
- Pincoin. The Pincoin ICO raised $660 million. The developers promptly disappeared, leaving thousands of disgruntled investors outside their Vietnam-based headquarters.
- AriseBank. AriseBank launched with the intent of becoming the world’s first decentralized bank. The SEC claims that AriseBank was purposefully misleading in investor materials and tricked investors out of millions of dollars. The FBI froze all AriseBank assets and arrested AriseBank CEO Jared Rice Sr.
- ACChain, Puyin, and BioLifeChain. Whoah, three in one? That’s right; Shenzen Puyin Blockchain has launched three separate ICOs, claiming over $60 million in the process. In May 2018, Chinese police arrested six suspects directly involved in the scams.
- Seele. In the run-up to the long-awaited Telegram ICO, hackers posed as Telegram team members and made off with over $2 million in Ethereum.
- Benebit. The meticulously planned ICO exit scam netted the fraudsters as much as $4 million. Several reputable ICO tracking sites gave Benebit high scores for security, trust, and confidence, lending authority to the ICO.
These are just five (or seven, depending on how you look at it) examples of ICO scams. But the risks don’t stop with development team exit scams and shady investment materials.
Keen to jump on the ICO bandwagon, a number of celebrities have endorsed ICOs, for better or worse. Well, largely worse.
One prime example recently came home to roost. Floyd Mayweather, one of the greatest ever boxers and multimillionaire to boot, hitched his name to the Centra ICO (along with DJ Khaled). It was later revealed that the $32 million ICO was an elaborate scam as Centra Tech founders Raymond Trapani, Sohrab Sharma, and Robert Farkas, were found guilty of trying to defraud investors. In November 2018, Mayweather and Khaled both settled with the SEC after the commission charged them with receiving payment to promote the Centra ICO without making an official disclosure.
The Game, Steven Seagal, Paris Hilton, Imogen Heap, Akon, Ghostface Killah, Gramatik, Jamie Foxx, and other celebrities have dabbled with ICOs in some form or another, to varying levels of success, too.
Fake Plastic ICOs
Celebrity endorsements of unethical or shady companies are one thing, outright fraud is quite another. Since ICOs are currently completely unregulated, investors have no legal recourse or security in their investment. Hence many institutional and traditional investors suggesting that staying clear of ICOs and other blockchain investments is not a bad idea. For every success story like Ethereum, there is a handful of unsuccessful or fraudulent ICOs.
In September 2017, the Securities and Exchange Commission (SEC) charged a businessman and two companies with defrauding investors in two ICOs. According to the SEC, Maksim Zaslavskiy and his two companies, REcoin Ground Foundation and DRC World, sold coins and tokens that didn’t exist. On top of this, they have also been accused of deceiving investors about how much money had already been raised, and the current state of the businesses.
Jordan Belfort, the trader portrayed by Leonardo DiCaprio in The Wolf of Wall Street, recently stated that “promoters [of ICOs] are perpetuating a massive scam of the highest order on everyone.” He said that many were using “pump and dump” techniques to pique interest, then sell before the coins lose value. His statement should be taken seriously—this is a technique Belfort’s firm Stratton Oakmont indulged in, which culminated in his 22-month prison term. (In that sense, altcoins and ICOs have become the modern penny stock.)
Can You Make Money From an ICO?
The big question. Can you make money investing in an ICO?
Can you lose money investing in an ICO?
You can guarantee it.
You have seen the numbers. The investment market for ICOs is enormous even as bitcoin and other cryptocurrencies experience a rough patch. That is because, for all of the risks an ICO presents, the ICO is still an extremely attractive investment proposition (if you can accept the strong chance you will lose your money). If the ICO you choose actually makes it to the big times and the coin price moons by 1000x, you’re having a good time.
Furthermore, ICOs do produce excellent products. A huge range of cryptocurrency and blockchain products began life as an ICO—but the process, along with the technology, is still in its infancy.
Keen to invest in an ICO? First, check out these warning signs of a scam ICO before diving in and parting with your hard-earned money.