One of the more common methods for a new blockchain or dApp (decentralised application) to raise development funding is known as an initial coin offering, or ICO. These are comparable to the initial public offerings (IPOs) used by companies when they first sell their issued stock to the public. Most new blockchain projects have their own native currency that will be used to interact with the network. In an ICO, the project leaders will offer to sell a percentage of that native currency to the public for a set price. It allows them to raise funding without going through the regulated systems currently used by banks and venture capitalists. Smart contracts can be used to facilitate the transaction, accepting one cryptocurrency such as Bitcoin, and sending back the new native cryptocurrency to the investor.
ICOs are highly volatile due to the speculative nature of the industry, which makes them very popular amongst investors looking for a quick return profit. However, the lack of regulation means there is no guarantee the project isn’t fraudulent, and there is often little you can do to get your money back in the case of a scam. This has led to many countries scrambling to restrict or outright ban ICOs, and it means you need to be extremely careful and do lots of research into the project before participating in one.
If you’ve seen an ICO that you’re interested in joining, you should first check out our article on avoiding scams. There are a few red flags that you should always be on the lookout for before sending money to anyone.