If there’s been one word on the lips of everyone in finance this past year, it’s cryptocurrency. If you’ve been kicking yourself for not getting in on the ground floor of blockbuster coins like Bitcoin (BTC) and Ethereum (ETH), you might want to consider looking into investing in an Initial Coin Offering (ICO). Be warned, however: ICOs are highly risky even under the best of circumstances, and have a high potential for scams.
So What Exactly Is An ICO, Anyway?
Imagine this: You’re a Silicon Valley startup with a great idea for a new cryptocurrency system. Perhaps you want to streamline the Parent/Babysitter payment system so that it can be digital and encrypted. What a great idea! Let’s call it BabyCoin. The only problem is you need people to give you money so you can actually make the currency. Now, you could go to a bank or try getting venture capitalist investors, but what if you could raise money without having to give up any of your ownership of the company? Enter ICO.
Here’s how it works, You create a document essentially detailing exactly how the system would work (usually called a white paper), make a pretty website and explain why its a great idea that could be very useful. Then, you ask for people to send you money (usually Bitcoin or Ether, but you can also take fiat) and in return you send them back some BabyCoin. They hope that BabyCoin will get used a lot and be in high circulation, which would raise the value of the currency.
Its important to note that unlike an Initial Public Offering (IPO), investing in an ICO won’t result in you having an ownership stake of the company you’re giving money to. You’re gambling that the currently worthless currency you pay for now will increase in worth later and make you money.
So Who Can Launch an ICO?
Literally anyone! Currently, there’s very little regulation on ICOs in America, meaning as long as you can get the tech set up you’re free to try and get your currency funded. Right now cryptocurrency as a whole is kind of like the wild west; there’s gold in the hills and relatively little law to speak of. This can work in your favor or it can lead to getting swindled. Of all avenues of funding, an ICO is probably one of the easiest to set up as a scam. Since there’s no regulation there’s nothing stopping someone from doing all the work to make you believe they have a great idea, and then absconding with the money.
This means that if you’re really set on getting in on that new ICO that your friend Aiden from work told you about, make sure you do your homework. The first thing to do is make sure that the people putting up the ICO are real and accountable. In the internet age its beyond easy to find a stock photo and put together a convincing website, so going the extra mile is important. Some things to look for: What history do the product’s leads have with crypto or blockchain? If it looks like they don’t have anyone with relevant experience that can be easily verified, that’s a bad sign.
What’s With All These Celebrity ICOs?
If you’ve seen your favorite actors and entertainers like Jamie Fox and Ghostface Killah encouraging their followers to invest in a hot new ICO, you might want to take a closer look.
Boxing superstar Floyd Mayweather Jr and DJ Khaled promoted Centra, an ICO that raised $30 million at the end of 2017, but multiple reports claim that Centra is currently embroiled in a class action lawsuit for allegedly selling unregistered securities. It remains to be see what will happen with the lawsuit, but its worth noting that some of Khaled’s and Mayweather’s social media posts about the ICO have been deleted.
I Want to Invest in ICOs. How Do I Determine Which Ones Are Good?
Maybe check out this list. Just make sure to do your homework. Because ICOs are barely regulated, you need to be way more careful than you’d be when investing in an IPO. Read the white paper, research the team members and make sure they have a history in cryptocurrency.
You can also use trusted websites like Coinschedule.com, which only chooses ICOs that they have reviewed and consider to be legit and exciting. While you shouldn’t fully trust any website offering a listing, they can be quite useful.
Is Someone Going To Regulate ICOs?
The SEC classified tokens from ICOs as securities in December of 2017, with SEC Chairman Jay Clayton saying at the time that they had proved that “a token constituted an investment contract and therefore was a security under our federal securities laws. Specifically, we concluded that the token offering represented an investment of money in a common enterprise with a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others.”
This means the SEC is gearing up to crack down on ICOs that they deem to be misleading investors. The first strike came on December 11, 2017 when the SEC halted Munchee, a California company with a food review app. Munchee was attempting to raise money to create a cryptocurrency that would work within the app to order food. This is the first instance of the SEC issuing a cease and desist for an ICO for unregistered securities. Does this mean the hammer is about to drop? We’ll see.
The Bottom Line
In the end, ICOs are an incredibly new way of raising money, and everyone is trying to adapt to the new ways without getting screwed over. If you think you’re able to make a killing on a promising new ICO, just make sure to do your homework beforehand. Cryptocurrency is all about high risk, high reward, and ICOs are no different.
Read more: What Is An ICO? | Investopedia https://www.investopedia.com/news/what-ico/#ixzz5WXDDWclf Follow us: Investopedia on Facebook
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