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Risks of Investing in an ICO

Bitcoin and blockchain technology are one of the most popular forms of money investment these days. Before gambling with your money, be sure to analyze the many risks involved in the game.

By Morgan E. WestlingPublished 6 years ago 5 min read

Investing in an ICO, or an initial coin offering, can provide both huge financial benefits and huge risks. Many people are intrigued by the growing digital currency industry that includes blockchain technology, because the potential is there to raise money very quickly. However, long term, the outcome can be grim, and many people end up losing the money they initially invested. There are many reasons why most ICOs fail. When investing in an ICO, people must exercise due diligence and make sure they know the risk they are taking. Here are some of the most common risks when investing in an ICO.

One big risk regarding ICOs is the fact that right now, every ICO is unregulated. However, in the future, this may not be the case. Everyone is currently investing in ICOs to make a quick buck, but they don’t realize that the quicker ICOs become popular, the more likely ICOs are to become regulated soon. If ICOs do become regulated, what will happen to the ICO tokens that have been previously purchased? Many ICOs may be sold or lose value. ICO regulation is a huge unknown and a huge risk for those looking to raise funds and keep them.

Investing in an ICO is risky whether you choose an Ethereum ICO or a Bitcoin ICO. While smart contracts may be put in place to help you with your exchanges, there are no official licenses in place to solidify your investments. If you are contributing to or trying to start your own business, a developing team of many ICOs and ICO contributors may seem like a great way to raise money; however, long term, this may come back to bite you. The ICO price can drop quickly and you can lose everything your company was built on if you aren’t extremely careful.

There are many tax risks and issues that can arise from investing in an ICO. ICO tokens can be classified as many different things when it comes to taxes. Some are classified as equity, some are property, some are debt, and some are prepaid goods/services. Every ICO must be treated differently depending on its tax classification. The risk that comes with this digital currency is making sure to report and withhold every ICO token correctly. Getting in trouble with the government over taxes is no joke in the real world. Many people may think they can get away with small slips in their taxes when using blockchain technology, but this is not a risk worth taking.

Venture capitalists who invest in ICOs take a huge risk, because blockchain technology is a digital currency and can be easily susceptible to cyber attacks. Along with many other risks, cybercriminals are always looking for new ways to hack the system and steal cryptocurrency through the web. The most common way that cyber attacks happen in the real world is through phishing scams, in which individual’s identities are stolen.

Along with cyber attacks, investing in an ICO has the risk for fraud. Identity theft is common with initial coin offering ICOs, because if a person’s identity is successfully stolen from outside the United States and their digital currency is taken, it is very unlikely that the authentic owner of the ICO tokens will be able to recover their funds. Unfortunately, once outside of United States jurisdiction, there is not much power over the situation. With the internet and digital space being so large, it allows fraud to happen internationally, and the risk becomes much more real.

When investing in an ICO, you can have ICO tokens. These tokens are based on smart contracts such as Ethereum. The risks of buying these ICO tokens is that they can be stolen, lost, and your online or offline wallet can be hacked just like real world money. Also, when buying ICO tokens, there is no guarantee that you will be able to sell these tokens later. The game of Ethereum ICOs and ICO tokens is a risk you must be willing to take. Make sure you know how to buy an ICO the right way if you do decide to buy the tokens.

We aren’t necessarily sure if investing in ICOs is legal or not, which makes it very risky. Currently, initial coin offering ICOs are unclassified. However, many people think that cryptocurrencies can be classified as securities by the U.S Securities and Exchange Commission. If cryptocurrencies are securities, then they are, in fact, illegal. However, this is still up for debate by many. The point here is, digital currencies such as Bitcoin and Ethereum ICOs are at risk of being an illegal entity, so getting into this financial game may not be the best decision.

Investing in ICOs can be risky, because the structure of ICOs is not always stable. Because special ICO prices can be reserved for advisors, investors, and hedge funds, ICO tokens can be sold at different rates throughout the market. Some investors may sell ICO tokens at higher rates and/or lower rates depending on what they bought them for. They may make a higher profit than other investors as well. The entire structure can be thrown off based on this. Token holders have no rights to decide what price ICO tokens must be sold for. The unsteady structure of the digital currency business can make it a risky place to invest.

Investor/contributor risks are heavy when investing in ICOs, because many investors and contributors do not have proper knowledge on how to buy and sell ICO tokens and use digital currency effectively yet. Because blockchain technology is still relatively new, everyone in the game is still learning the best strategies for investing and valuing their cryptocurrency. Until we have better knowledge and regulations on this system overall, the risks will continue to be high.

Developing teams who are investing in ICOs are like investors who once put venture capital into the dot com game. While investors who bet their money on the internet saw their risk raise money in the end, the benefits may not be the same in the end for those participating in ICOs. Only time will tell, but the team risks of ICOs are heavy. Of course, the only way to raise funds in a big way is to risk in a big way. Big risk yields either big reward or big loss.

As you can see, there are many risks involved in investing in an ICO. However, it is also possible to raise money very quickly with ICOs. That is what makes cryptocurrency so appealing. If you like to live on the edge and don’t mind the possibility of losing to gain, then ICOs may be right up your alley. Just be sure you perform your due diligence and do your research first, knowing the right ways to choose an ICO to invest in.


About the Creator

Morgan E. Westling

Avid Reader, Freelance Writer/Editor, and Lifestyle Blogger

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