Initial Coin Offerings (ICO) have made plenty of people very wealthy. For a while it was a license to print money. However, while it made many people rich; it inadvertently led to the creation of many high-profit scams. Large amounts of money changed hands with entrepreneurs, programmers and software gurus across the globe all involved.
However, it now appears that the curtain is finally closing for ICOs. Let’s find out why.
What is an ICO?
An ICO is a method for companies involved in cryptocurrency to raise capital. It starts with a firm announcing their new intended product. Before development of the product begins, they sell an initial set amount of their tokens that will be provided to buyers once the project takes off. The company then uses the initial capital received to build the product and set a price for the new token. Investors then hope that the price is much higher than their initial investment.
To better understand how and why ICOs worked so well, it’s also important to have a grasp of blockchain technology.
What is Blockchain?
Blockchain is a form of digital data storage in which users create records on a “ledger”. This “ledger” is distributed and available to ALL parties involved in the blockchain system. It’s open for many people to view however only if they are authorised. This means that programmers can use blockchain to create unique digital assets.
The architecture of blockchain means that everyone can see the unique digital assets that are created. However, the secure nature of blockchain means that no unauthorized changes to the asset can be made. This is what led to the creation of cryptocurrency tokens. As you know, crypto can be spent, traded and invested just like real money.
Blockchain firms make and sell these crypto tokens with the hope that they increase in value over time before hitting a stable value due to supply and demand. For this reason, majority of people buy crypto not to use, but in the hope that the price will increase. It’s this phenomenon that led to the ICO.
As mentioned above, blockchain companies can use an ICO to raise startup funds. They sell tokens during their initial start-up phase and buyers receive the money once the project is launched. These companies aim to raise enough money to build the project they have promised their investors, without having to take out a loan. Investors hope that the token price rises, and they make a quick buck.
The slow demise of the ICO!
As of today, the ICO is essentially dead. Here is why:
Scams: Unlike the traditional initial public offering (IPO), which involves a company that people have more than likely heard of and trust, an ICO doesn’t put anything forward to investors except documentation promising what the future project will be. Websites, papers etc can all be easily faked to lure people into investing. For this reason, many scammers see ICO as an opportunity to make easy money. They make fake websites in an attempt to get people to invest their hard-earned money. At one point it’s estimated that close to 80% of all ICO websites were fraudulent.
Utility tokens don’t exist: There actually isn’t such a thing as a utility token. For an ICO to work it relies on a lack of oversight. It is an extremely low-cost operation with the sole purpose of a company raising quick capital and then getting back to work. The company promotes the product solely on ambition and the promise of future riches. Again, the issue is that this is a prone environment for scams. The reason why an IPO is such a rigorous process is so that scams and embezzlement can be avoided. When a new IPO is launched, the Securities and Exchange Commission become involved, ensuring no wiggle room for illegal activity.
The length and cost involved with an IPO is exactly why blockchain companies don’t want to go through it. The argument put forward is that an initial coin offering has different rules, as a utility token is a product, as opposed to a security. They argue that investors and traders buy a utility token to use in a software environment; any subsequent trading is supportive of its core purpose. Therefore, they believe that an ICO does not require regulatory action.
The Securities and Exchange Commission do not agree with this view, and rightfully so. The main reason people buy crypto is for investment purposes. As a result, crypto meets the criteria for what the Securities and Exchange Commission label a security and therefore should be regulated.
Many people have made a lot of money off ICOs. However, lurking in the background was an environment fraught with embezzlement of funds, fraudulent behaviour, and corruption that caused a lot of people a lot of financial pain. Glady it appears that the days of ICOs are behind us and the team at Cryptosouk believe this is for the best. Crypto trading should be a fair game for all involved, free of scammers and fraudsters. That’s why at Cryptosouk.io we’ve created a Crypto platform environment so that you as a trader or investor have access to secure trade tools made just for you. A next generation digital asset exchange for traders of every skill level. If you’re ready to trade with no trade-offs, join the Cryptosouk team today.
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