An initial coin offering (ICO) is a fundraising mechanism wherein new blockchain startups sell cryptotokens or cryptocurrencies to investors in exchange for capital to fund the startup process. The token sales allow investors to fund ambitious projects for the next generation of successful companies. In return for purchasing tokens, the investors share in the returns as the project matures and becomes financially viable.
An ICO bears similarity to an Initial Public Offering (IPO), where a company sells shares of their business to investors, however, there is a key difference. IPOs are subject to regularization whereas ICOs are not, leaving the playing field of new platforms ripe with potential for exploitation. ICOs have high volatility risk, but also the ability to be extremely profitable.
Knowledge is power for potential investors
Before investing in an ICO, potential investors need to review the enterprise thoroughly to avoid a scam. Reviewing the following key points allows a potential investor to make an informed decision.
- Establishing legitimacy: Before investing a dime, research the company and team members. A company serious about using an ICO will have no qualms about identifying its history and team members to potential investors. Counter-check the names and stated experience of team members to make sure everything matches. It can even be helpful to perform an image search of the team member’s profile photos which allow the browser to search for other instances of the same photo.
- Online presence: Real companies using an ICO will have a strong online and social media presence. Genuine blockchain projects have thriving online communities, such as a forum or blog, that allow investors to learn more about the enterprise and pose questions. A legitimate ICO should have links to various social media sites that allow investors to interact with developers. Be wary of an ICO that overuses buzzwords and touts blockchain as a solution to every problem.
- Viable whitepaper: A viable ICO will have a technical roadmap for the product with details about how and when the product will be built. The white paper should also delineate the token distribution model. A shallow plan with few factual details is a sign the investment should not be trusted. Be leery of whitepapers that seem fraudulent or plagiarized.
- Realistic promises: Investors want a return on investment, but uncontrolled greed leaves an investor open to a scam. No investment form, no matter how promising, has a guarantee of generating profits. Offerings promising guaranteed profits should raise a red flag. Also, astronomical growth rates are not sustainable long-term and indicate a scam.
As with most things, common sense and trusting your intuition goes a long way towards protecting yourself from getting scammed by unscrupulous entrepreneurs. The best thing potential investors can do is to maintain a skeptical perspective and be on the lookout for anything that seems too good to be true.