Is initial coin offerings a scam? This is the question that has been on the lips of many would-be investors. This is understandable due to the sort of publicity the sector has had.
There are many people that told me that they regretted not investing in the coin market last year when people were making a lot of money in the industry.
With the price of Bitcoin and all the altcoins plunging, these people are wondering what all the hype was all about. They are wondering if people were sold a dummy last year by the early investors.
To answer the question, “Is initial coin offerings a scam?” Let us examine what ICOs are and the impact it has made if any.
Industry Hottest Topic
Everyone that knows about cryptocurrency may have heard of initial coin offerings. It has been the hottest topic in the industry with the capacity to revolutionize the way we use money.
Companies and startups have been selling tokens since 2014 after Ethereum sold its tokens to investors. Basically, initial coin offering involves companies selling fractions of a new coin they have created for older coins such as bitcoin and ether.
Essentially, initial coin offering is like stocks that companies sell to investors except that most of the entities selling tokens in ICOs are mainly new businesses that have not even built the alpha version of their concepts. The only thing they came to sell was an idea.
Origin of ICO
The genesis of initial coin offering was sometime in 2013 when the company we now know as Ripple Labs minted 100 billion XRP. The purpose was to sell these tokens for bitcoin and use the proceeds to develop the Ripple platform. The sale raised the funds that built the cross-border payment platform that is the third most capitalized coin today.
Other projects such as Mastercoin raised $1 million in 2013. The company planned to build an application on Bitcoin sidechain to enable smart contract.
Lisk would later in that year raise $5 million before Ethereum raised a whooping $20 million the following year in an unprecedented initial coin offering. Since then there have been crowdsales that have raised more than a billion as seen this year with the Telegram open network.
A Partial Success
Some of the platforms that raised funds through initial coin offerings have gone ahead to create useful tools and business models that have added some value to the society.
Ethereum for instance has a platform on which most decentralized applications are built on. Its smart contract has been the precursor of a thriving sub-industry helping many legitimate businesses to raise funds.
Another company, Sirin Labs launched its ICO early in the year and this month has released its product, the first blockchain phone.
Perhaps the challenge the industry has is that companies that showed competence in following through with their roadmap and coming up with any product are few.
A Money-Making Tool To Some
There have been allegations that many of the others merely saw initial coin offerings as a tool to raise money and become overnight millionaires.
The US congressman from California, Brad Sherman at a point called for a ban on cryptocurrencies due to the supposed poor utility of projects that have raised millions of dollars. According to him, these were people becoming millionaires in pajamas.
Among the factors that have presented initial coin offerings in bad light include the activities of hackers and scammers. For instance in 2014, the then largest crypto exchange, Mt Gox was hacked crashing the price of Bitcoin.
The quest to pay back the investors has continued to be an issue in a market that has since experienced a downturn.
Heists Are Not Uncommon Yet There Are Succeses
Another heist that has contributed to the negative publicity of ICO is the DAO ICO which raised $100 million. That project held a lot of potentials as a project that would have been exemplary in decentralized organization governance but hackers stole half of the funds raised causing the project to fail.
Since then there have been many successful ICOs launched on the Ethereum platform such as Golem, Augur, Melonport, First Blood and many others. We have earlier talked about Sirin Labs, Ripples and others.
Nevertheless there have also been many projects that can realistically be described as useless and scams these are responsible for the negative publicity that has made many consider ICOs as scams.
Nevertheless, that these bad actors are part of the ICO ecosystem does not preclude the fact that there are many good projects that have helped the ecosystem. It is expected that any unregulated system will have such problems and a decentralized network is nearly practically impossible to regulate without global cooperation.
Occasional Warnings By Authorities
Some governments have raised concerns about initial coin offerings sometimes advising citizens to keep away from them. For instance, the UAE Securities and Commodities Authority in May released a statement that read:
“Securities and Commodities Authority (SCA) UAE would like to caution investors regarding digital token based fundraising activities / investment schemes in UAE, which may be referred to as “initial coin offerings”, “initial token offerings”, “token pre-sale”, “token crowd-sale” (collectively referred to as ICO schemes hereon).”
The statement continued,
“ICOs involve issuance of digital tokens created using distributed ledger technology and sold to investors by action or through subscription, in return for cryptocurrency. The terms and features of ICOs differ in each case, as does the nature of the rights or interest (if any) that is acquired by the investor. The ICOs are highly speculative and are characterized high volatility in the prices of tokens.”
The risk associated with initial coin offerings is not unconnected with the absence of regulation. Complicating the issue is the fact that the promoters of an initial coin offering are not held liable if they fail to deliver because most times, the investors come from very different jurisdictions.
Low Score But Not Scam
Available data shows that 80 percent of ICOs hosted since 2017 have not delivered on their roadmaps. Some terminated at various stages of their roadmaps while very few have successfully developed an alpha version of their products.
There also is the issue of scams. 10 percent of ICO funds raised were lost to scams.
Nevertheless, is initial coin offerings a scam due to these factors? One can barely call it scam. What the community needs is greater due diligence that ensures investors are protected.
What is your opinion about initial coin offerings? Let us know at the comment box below.