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What is ICO: pros and cons from trader’s viewpoint

Speaking about an Initial Coin Offering and its significance for modern traders, let us talk about not only its advantages but also about risks that it may pose to beginners in this sphere. This issue is worth our particular attention.

One of the major advantages of ICOs is their low cost comparing to an IPO (Initial Public Offering). Experts say that it is much easier to organize an ICO than to conduct an IPO. For carrying out an ICO, a project does not need any agents who are required at IPOs. Besides, it is not necessary to pay banks for making transactions during an ICO.

Not only professional traders and investors are allowed to participate in ICOs – numerous cryptocurrency owners can be involved in this process. This is also an obvious advantage of Initial Coin Offerings. Most ICOs do not impose minimum investment requirements and it is not necessary to open brokerage and deposit accounts. Furthermore, participants of ICOs do not need to be accredited before buying tokens while projects that plan to offer their coins are not required to provide account statements with audit reports and publication of reports in accordance with the regulatory requirements of the country where theICO is conducted.

Another important advantage of ICOs is that they bring high profits and entail massive fundraising. Participants of an ICO can secure investments comparable to sums that can be obtained during an IPO. Experts connect a rise in fundraising volumes with the surprising popularity of an initial token offering. Earlier, several millions of dollars could be raised during an ICO, whereas nowadays the volumes of attracted investments can reach up to $185 million. For example, this year the EOS blockchain project raised over $170 million for the first five days of its ICO. Another project, based on the Brave blockchain technology, secured over $73 million with $35 million of this sum being collected in the first 30 seconds of the ICO.

ICOs are particularly important for traders and investors if they enter a project in the early stages. In this case, a high profit is guaranteed. Let's consider the ICO of the Stratis project as an example. At its very beginning, a token cost $0.007 while afterwards the crypto coins appreciated to $10.58. As a result, the yield of this offering was 151,082%. In 2014 the Ethereum ecosystem raised more than 31 thousand bitcoins or $18 million by the end of its Initial Coin Offering. In June 2017 the ETH exchange rate skyrocketed to $407, increasing one thousand times comparing to the initial price.

Speaking about advantages of ICO, one should bear in mind drawbacks of the initial token offering and subsequent risks. One of them is the absence of regulatory requirements, so there are no:

  • Audited financial statements
  • Standards of information disclosure
  • KYC procedures relating to ICO participants.

To start an IPO, a company should provide the regulator of the country where it will be listed with a number of documents. They include audited IFRS financial statements as well as reports about full analysis of financial and operational activities, procedures of compiling financial statements and sufficiency of current assets. However, all these requirements are not applied to an ICO. On the one hand, it may be an advantage, but on the other hand a lack of regulation downgrades the degree of responsibility and arises concerns over transparency of a deal and inability to control it.

Some experts also say that ICOs entail a high possibility of cryptocurrency frauds and risks of cyber-attacks or protocol hacking. Nowadays, the issue of cyber security is still pressing, that is why the protocol of a project that launches an ICO may be a subject to a hacker attack. As a result, the raised investments may be stolen. Hackers can also snatch the personal data of investors and users. The best-known hacker attack occurred after The DAO investment fund conducted an ICO, raising over $165 million in May 2016. A month later fraudsters capitalized on the security vulnerability and withdrew about $50 million.

Traders and investors who decide to participate in the global cryptocurrency market need to evaluate the market potential and competitive performance of every new project themselves. Any project that holds an ICO may notch up a great success and secure huge investments but then it may turn out to be an unpopular technological platform. The Bancor project that raised over $150 million during an ICO came under intense criticism on the part of cryptocurrency community, claiming that the Bancor protocol contains fundamental errors and is subject to attacks.

Among disadvantages of initial coin offerings, specialists name an ill-defined legal status of the token as it has no clear legal definition. A token can be viewed as a digital product, digital coupon, call option, domestic or universal payment unit or a payment means. Cryptocurrencies do not follow the current regulatory rules in several aspects.

If tokens are regarded as an investment product, then a project using this method without corresponding licenses and approvals is considered to be violating local laws in several countries.

Absence of legal guarantees and transparency poses another risk to token owners as they may be left without any legal protection in case of force majeure. This means the property rights specified in the blockchain does not have any legal definition and does not guarantee cryptocurrency owners anything. According to statutory regulation, obtained tokens do not completely belong to their owner as the owner's rights are specified in the blockchain. It is unclear for now what legal field is going to solve issues and conflicts arisen in the digital currency sphere.

In the third article of our ICO series, we will touch on the current situation and development prospects of the ICO market – the brand-new financial sphere that offers amazing opportunities for traders.


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