In order to understand how an Initial Coin Offering (ICO) scam works, first it’s important to understand what cryptocurrency is. Recently, there is a rapid increase in the digital assets like cryptocurrencies globally. Through the digitization, the cryptocurrencies has gained a huge number of capitalization that is generated. Cryptocurrency is a type of currency that exists only in the digital space- there is no way to access it physically. It can be exchanged between people in order to buy and sell goods like actual currency. However, this exchange can only take place virtually.
Unlike government-issued money, cryptocurrency exists as its own entity. To store any money that we earn, we use intermediaries like banks. Cryptocurrencies, unlike money, do not need any such intermediaries. They can simply be stored in a computer file, digital wallet, or hard drive, and accessed whenever needed. Cryptocurrency can also be exchanged freely and can be cashed out to dollars using an online conversion service.
Understanding the Initial Coin Offering
Similar to stocks, the value of cryptocurrency can fluctuate heavily due to the effect of ever-changing supply and demand. Some cryptocurrencies are extremely volatile. Their worth can change from being in the thousands to almost nothing in a mere matter of days. The idea of Initial Coin Offering came from Crowdfunding. The funds that are hiked in Initail Coin Offering where the projects that are developed at the conceptual level.
There aren’t any regulatory bodies like banks involved in its exchanges due to cryptocurrency only existing electronically. This gives scammers an opening to use it for defrauding investors. Cryptocurrency offers anonymity to its user, which makes it the perfect medium for making quick transactions. However, it also opens up gateways for online scammers to make quick money and disappear without a trace.
One of the most common types of cryptocurrency scams is by offering up a fake Initial Coin Offering (ICO), which is similar to an Initial Public Offering (IPO) in the stock market. The creators ask hopeful cryptocurrency owners to invest in these ICOs, who would then receive virtual ‘tokens‘ in return for their money. Once the developer of the cryptocurrency acquires enough funds, the ‘token’ goes live and users can trade it. If the cryptocurrency gains even traction, they can even develop their own blockchain systems. Doing so converts the tokens into ‘coins’. The most famous cryptocurrencies working with their own blockchains are Ethereum and Bitcoin.
Initial Coin Offering Advantages and Disadvantages
In contrast to lift up the funds in SME’s, a lot of Pros and Cons are included in the Initial Coin Offering. Depending on the endowment it guides the companies on how exactly to save the cost in raising the funds. The organizations will understand the effective advantages to use the blockchain as well as the automation. One can also invest as per the certain portion of tokens that are developed. In the Initial Coin Offering the ownership that is developed is not decided to handle any risks that occurs. Lastly, there is a valuable network that is being created where the customer base is formed and the value produced through the network’s effects.
Analysis
However, recent studies have concluded that around 80% of ICOs put up are fake! Only a few Initial Coin Offering actually manage to make it to the trading stage, in which case their investors are able to reap the rewards of their investments. Though the success rate of ICOs is low, a few which failed to make it to the cryptocurrency exchanges or did not manage to raise enough funds to complete the process did in fact refund their customers. However, many go under completely, with the issuer either disappearing with the funds or not being able to provide any compensation to the investors.
So, if Initial Coin Offering scams are that rampant, should you even invest in ICOs at all? Fortunately, there are a few ways in which you can determine whether the issuer is in fact genuine, in which case your investment may provide you with fantastic returns.
In order to actually list their Initial Coin Offering online, the issuer of the cryptocurrency must prepare and publish a document known as a ‘whitepaper’. This whitepaper includes all the aims and aspirations that the issuer wishes to achieve with their cryptocurrency. It also helps provide possible investors with a timeline and detailed plan about its implementation. The best way to determine if the issuer is genuine is to thoroughly research this document. If you are able to resonate with their goals, then you can invest!
Self-research on own proposed cryptocurrency
Always be sure to do your own research on the proposed cryptocurrency as well- find out more about the team working on it. Do a quick search on their previous projects and accomplishments, and of course, make sure that they are genuine people who show regular activity related to their proposal online. If you are unable to find any information on the developers online, it may not be such a good idea to put funds into their ICO.
Once you decide to invest, do check up on the cryptocurrency and see how many other people are investing. A genuine developer will make sure that the entire investing procedure is completely transparent. This helps encourage more potential investors to pour funds into their projects. The sales of their tokens must be easy to access and chart, and if this is not easily accessible- then it throws up some alarms. However, this may also be a tactic to encourage investors to put in money even if token sales aren’t going great, so it’s best to trust your instincts on this one.
As a holder of a token of the cryptocurrency, an investor is a part-owner of the project. This is similar to how a shareholder holds some ownership over the company. Any shareholder requires continuous updates on the progress of the company, its goals, and how it is using its funds to increase growth and provide dividends. Similarly, one must only invest in a cryptocurrency if they provide complete transparency with their procedures. A good cryptocurrency should have a rock-solid agenda in place. This will ensure that people are more likely to invest in a project that they are able to relate to.
Conclusion
So, should you invest in Initial Coin Offering or not? Similar to the stock market, there definitely is a risk factor- but there are chances of both risk and reward. Always make sure to do your own research if you are interested in investing. This will help to determine whether the ICO is genuine and if there is any potential for growth in the future. If you find that everything is in place, then you may invest in their tokens. The best thing to do is drop any plans of investing if you notice any red flags while doing your research. Happy investing!
