An initial coin offering (ICO) or any new coin can be launched via a sale to investors during its launch period, but is that process safe or could it be a scam?

If you want to know the answer to that you’ll need to know the answers to questions such as:

• What is an ICO?
• What is the difference between an ICO and an IPO?
• What are the risks of an ICO?
• Where does my money go in an ICO?

So, let’s go back to basics and understand just how safe Initial Coin Offerings really are.

ICOs Explained

When comparing it with traditional finance, an initial coin offering will work much like an initial public offering. In an initial public offering, a company sells some of their shares as means of getting money which will then go towards funding new projects or whatever else it might need capital for.

As for an initial coin offering, developers who are about to launch a coin or token will do an offering and sell some of their tokens for a set price. By doing so, they raise capital and start getting their coins or tokens out there. As you would expect there are, however, some differences between ICOs and IPOs.

What Are the Differences between an ICO and an IPO?

By buying stock from a company which is undergoing an IPO, you gain a certain amount of power within that company. This means that by doing so, you will own a fraction of that company which, in turn, means that you can cast your vote if you hold enough shares. As such, if you are committed to investing in a company’s Initial Public Offering, you have certainly performed a lot of research on the company, its ideas, projects, positioning, the industry in which it operates, and its short-, mid- and long-term plans, etc.

When it comes to an Initial Coin Offering, sometimes investors will put their money down without even seeing a finished product. Consequently, the risk is greatly increased.

What Are the Risks of an ICO?

A major difference between an ICO and an IPO is that while an IPO is heavily regulated by the Government or other entities such as the SEC, an Initial Coin Offering isn’t regulated by anyone. This in turn makes it so that pretty much anyone can create their own ICO. This clear lack of regulation, to put it simply, means that there is nothing stopping the project to get your money and run off with it, a scam known in the crypto universe as a 'rug pull'.

What Is a Rug Pull?

Rug pulls were a common phenomenon in the late 2010s as many developers raised a lot of money and promptly ran away with it, never to be seen again, simply because there weren’t any official regulations.

How Can I Know I Am Not About to Get Rug Pulled?

To avoid getting rug pulled you’ll want to do the maximum possible due diligence. You will need to know the project inside out: that means knowing who the team behind the project is, what their goal is, how they are going to achieve it (roadmap).

Where Does My Money Go in an ICO?

When you take part in an initial coin offering, you will be investing in a project, and the money you are providing will, in theory, go towards funding the said project and thus help the coin succeed. Not having that initial investment will hinder the coin’s success as it will certainly delay the implementation of specific features as well as the coin’s advertising and marketing strategy.

How to Profit in an ICO

By taking part in an ICO, you will also be granted early access to the coin at a presumably cheaper price. Once the coin launches and its price increases, investors can sell it at a profit.

Can I Profit from an ICO?

An important point to take notice of is that the vast majority of initial coin offerings have in fact not been able to follow this route as either their price fell after its launch, or the project never took off as it was planned to do. Profiting from an ICO has been an extremely hard endeavor for many. Given how risky it may be short-term, thus, proceeding with caution is expected.

Wrapping Up

When dealing with Initial Coin Offerings, one should always have one's eye out for scams. Even still, ICOs can still be a very promising space in which new and upcoming blockchains can be presented as they try to improve the crypto universe. As such, with rug pulling being a major con, many investors will still take part in ICOs because, let’s face it, you’ll never know when the next big thing is about to pop up.

And, in hindsight, wouldn’t you like to have been there for Bitcoin in 2010 when it was traded between $0.0008 and $0.08 per coin? Because we certainly would have.