Initial coin offerings (ICO) are the big craze in the crypto world. The concept of an ICO is similar to an initial public offering (IPO) in the legacy markets. During an IPO a new company will raise capital by selling shares to the public. This extra capital can help expand business operations and grow the company.
An ICO is similar except that it’s used to fund development for decentralized open-source projects. This is done by creating a fixed amount of coins or tokens and selling them in advance. Ethereum was the most successful ICO, which managed to raise a little over $18 million.
ICOs receive both praise and criticism in the crypto world. Let’s explore the pros and cons associated with the ICO model.
ICOs help fund decentralized open-source projects
The open-source movement is about making software free and available for anyone to use. Developers are also free to modify open-source code, which can lead to faster technological innovation.
The fact that Bitcoin is an open-source project adds to its decentralized nature, which makes it robust against attacks. Open-source software tends to be secure because it has many eyes auditing the code. In the crypto world this ensures that nobody can put malicious code in the software.
Since open-source projects are free it’s not always easy to pay developers for their work. Many programmers even contribute to these projects as volunteers. The ICO model is a way to pay full-time developers to work on open-source blockchains.
ICOs are easy ways for smaller players to raise capital
Peer-to-peer crowdfunding is an easy way for smaller players to raise capital. Cryptocurrencies have a low financial barrier to entry and less friction than legacy channels. Anyone with a good idea has the potential to raise millions of dollars in capital. ICOs come with less red tape and is more cost effective than any other model of fundraising.
Combining the power of crypto with the ICO model can help level the economic playing field. Wealth tends to be centralized in western nations but the lack of borders for crypto and the internet has the potential to redistribute opportunity.
ICOs can be profitable for investors
Participants of ICOs have the potential to make a lot of money because they usually get coins for dirt cheap before they hit the exchanges. During the ethereum ICO some investors received over 1000 ether for one bitcoin. Those who sold ether at its last peak would have made a return of at least 36 bitcoins. That’s a 3600% return on investment!
Some ICOs are scams
The crypto industry is rife with altcoin scams. There are some ICOs that promise the moon and then run off with everyone’s money. It’s even possible to launch an ICO anonymously with zero accountability to the participants.
The greed associated with making big returns can often cloud people’s judgement. Cryptocurrencies are the wild west and people can make huge profits or losses. Investors need to do fundamental research and be discerning when participating in ICOs.
Some ICOs lack innovation
The whole point of an ICO is to raise capital to fund new innovations in the blockchain space. There are many ICOs that are a mere copy and paste of other coins and bring nothing new to the table. This completely defeats the purpose of the ICO model and takes away potential investors for unique projects.
ICOs at their worst are just a cheap “get rich quick” gimmick for both investors and developers. I suspect that less than 10% of the ICOs offer anything new. The markets are saturated with ICOs and we’re likely in a bubble.
ICOs are similar to pre-mining
Back in the day, pre-mined coins were considered dirty. Pre-mining means that the developers mine their coin before anyone else gets a chance to. This gives them an unfair competitive advantage to accumulate a sizable amount of coins at no cost. The real shady devs will even hype their coin getting everyone to pump up the price so that they can dump on everyone.
The ICO model does receive some criticism because developers can create coins out of thin air, sell them and even keep a huge percentage of the coin supply for themselves. Since there is no oversight some altcoin programmers will charge exorbitant rates that are way above industry standards. Now compare that to projects like Bitcoin where most of the devs are working as volunteers.
Here at Skill Incubator we are crypto agnostic and always look at both sides of the coin. We do a lot of fundamental and technical research before making a trade or investment. We support the open-source decentralized movement yet remain skeptical of new coins. That said, if we see an opportunity to make money we’re not shy to turn a profit.
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