In 2008, the world was reeling from a financial crisis. The crack on the wall was long visible before then: in the early-to-mid 2020s, when housing prices increased, many banks, due to deregulation in the financial industry, started expanding their mortgage products to buyers with poor credit histories. Then home prices faltered, and the crisis began. Bitcoin was developed by Satoshi Nakamoto as the first cryptocurrency in 2008 for use as a medium of daily exchange to find a way around the traditional banking system following the collapse. Since, the cryptocurrency market has expanded and, besides Bitcoin, now has over 4,000 coins as of January 2021.
Initial Coin Offering (Source: moneycrashers.com)
From April 2011 to the beginning of 2015, Bitcoin jumped from $1 to $315, although many bumpy drops along the way. Then, on Tuesday, April 13, 2021, its price surged to a record high of over $60,0000, climbing as high as $63,729.5. The phenomenal success of Bitcoin now inspires many cryptocurrency projects around the world, as seen in ICOs.
What are ICOs?
There is an initial public offering (IPO) for stocks via which the shares of a private business are listed on a major exchange for the first time to become publicly traded. Through this process, companies raise capital to expand their operations while investors receive portions of the business in proportion to their investments. For cryptocurrencies, an initial coin offering (ICO) is the equivalent. An initial coin offering (ICO) is the process through which cryptocurrency startups raise capital from investors. During ICOs, a cryptocurrency is sold in exchange for a fiat currency or another cryptocurrency.
However, while IPOs are regulated by the Securities and Exchange Commission (SEC) in the United States, for example, ICOs are still largely unregulated. They are, as a result, subject to different sorts of manipulation by their operators.
How ICOs Work
The first step towards launching an ICO ie, publishing a white paper, a well-outlined and informative description of the cryptocurrency project, team members, budget, accepted currencies, and timeline to persuade the public about the coin offering or ICO. A specific number of coins or tokens are offered for sale, the price is set, and investors are invited to invest. While the cost of an ICO project can be steadily kept throughout its campaign, it can also be adjusted from time to time to ensure that it raises as much capital as it needs. Sometimes, individuals are encouraged to invest in ICOs through preferential treatment and the offering of bonuses. To guarantee safety, an escrow service, a third-party that will temporarily hold money for investors before deals are finalized, after which it will be released to the ICO team, is used.
How to Tell a Scam ICO
In the ICO world, there are a lot of scams. Even that a coin has an accompanying white paper does not certify its genuineness. This is largely because the cryptocurrency world is still far away from the prying eyes of regulators. As a result, the responsibility is solely on you to tell legitimate ICOs from fraudulent ones. You can avoid an ICO scam by being on the lookout for the following red flags:
- Poor promotion: You must have adequate information about the ICO project you want to invest in. The white paper or website promoting it must be detailed enough and answers every question you have. If you cannot find research resources on any ICO project, stay away from it.
- Biased reward structure: To keep mining, miners have to feel that they will be fairly rewarded. Thus, if an ICO’s mining structure rewards pre-launch investors with a large number of pre-mined tokens, it is most likely for short-term gains.
- Uncapped fundraising targets: If a cryptocurrency project does not have a capped fundraising target, it is most likely a fraud. Often, such an arrangement is to profit off the pockets of unsuspecting individuals.
Unclear outline: A credible cryptocurrency project must have specific value propositions. That is, it must have a particular challenge or challenges that it wants to solve. Never invest in any that does not.
The information on this website and all associated literature are for educational and informational purposes. It does not constitute a fiduciary duty or obligation between Uncut Lab and you. Please consult your financial and investment professional for your specific situation.