Pros and cons of ICO (Initial Coin Offering)
What are the benefits of having an ICO (Initial Coin Offering)?
Here are the main reasons ICOs make for a smart investment for businesses, organizations, and companies:
- Minimal (to zero) entry constraints. As opposed to most traditional IPOs that limit participants to a closed group of large-sized businesses and multimillion investors and capitalists, ICOs provide everybody the chance to make small investments and an equal opportunity to reap huge returns on investment when the ICO project turns out successful.
- Potential for exponential growth. In the cryptocurrency world, players use tokens to purchase goods or services offered by the company. Today, these tokens have a collective market cap of billions that continue to increase each day. So imagine the purchasing power and the return of investment you get if the ICO cryptocurrency you invest in acquires the market trust over time.
- Worldwide access and connection. ICOs set no geographical barriers. The cryptocurrency platform breaks down barriers and discrimination between professional capitalists and small investors, allowing millions of people across the globe to grow their network and become amateur traders where some will succeed and some others fail and most likely lose it all.
- Easy and simple validation. If you intend to buy tokens for the ICO, you simply need the private keys or code to validate your ownership and you’re instantly a major player in the whole market, where cryptocurrency assets and properties are not decided upon by a national court but by an international blockchain platform.
What are the risks and drawbacks of having an ICO?
As with any investment plans, ICOs come with their own set of risks and drawbacks, categorizing them under those involving consumer protection, market risks, and regulatory compliance. The major ones include the following:
- Consumers are not protected from the ICOs’ lack of due diligence, as no formal processes or systems are being set up to audit these organizations who may carry out token sales even prior to making significant milestones in creating a functional product or having no proof or guarantee that the technology will actually work or the business will be able to operate successfully.
- The lack of clear token valuation systems in ICOs can put consumers at risk, especially when buyers are not made aware that token prices and value are based on expected resale profits, which can be very unpredictable, rather than the underlying economic utility. This can encourage Ponzi schemes and bubbles that merely favor older investors gaining from the inflow of capital of new investors.
- Token prices in ICO sales are highly volatile, which obviously translates to high risks for investors, a clear and direct reflection of underlying market manipulation, another major risk in the cryptocurrency market. Amateur traders should be fully aware and be vigilant of the various manipulations that the token currency can be subjected to. These can include manipulative practices from “whales,” front-running, spoofing, pumping, and dumping, among others.
- With tokens being easily sent to and from cryptographic addresses, anonymous or pseudonymous token buyers are rampant in the crypto space, making it more difficult to implement know-your-customer requirements that are vital in enabling existing anti-money-laundering regulations that help counter the risks of terrorism.