While investing in the right ICO can lead to large profits, this relatively new phenomenon also poses a number of key risks to investors. So far, more than 20 countries have in fact issued statements alerting residents and citizens of the potential risks posed by ICO investment – clearly, there is some cause for concern. This article will list a number of these risks, so cryptocurrency users can make an informed decision about whether or not they want to enter such a venture.
The first risk is regulatory and is connected to the fact that ICOs are so new that they are subject to relatively few regulations, which is exacerbated by the fact that they are simply conducted online and may well function outside of any specific legal framework. While ICOs can be a great way to raise money for legitimate projects, they are also an ideal way to raise large sums of money fast and anonymously, and can thus end up being used for money-laundering practices or to fund terrorism. The absolute safest route would be to only invest in ICOs which highlight their association with legal firms on their page, and which only sell tokens to accredited investors – but this may drastically reduce the amount of ICOs a user can participate in.
The dangers of cybercrime
Even when an ICO is conducted honestly, however, cyberattacks and fraud are not outside of the realm of possibility, precisely because of this relative lack of transparency and largely online presence. Cybercriminals may choose to impersonate the developer of an ICO in order to steal funds from investors; in fact, a recent report estimated that 10% of all funds raised for ICOs ends up in the hands of criminals, which includes criminals who attempt to use legitimate ICOs for their own personal gain.
Startups, overfunding and underfunding
A further risk is connected to the nature of start-up businesses. Even if an ICO is entirely above-board, conducted by honest developers who genuinely believe in their project, it still remains a fact that many, if not most, start-up businesses fail to become profitable. This is something to bear in mind before investing heavily in a cryptocurrency ICO, and it is a risk that can be limited somewhat with a thorough examination of the whitepaper and roadmap. These may help investors assess how likely it is that the project actually comes to (profitable) fruition.
In this regard, both underfunding and overfunding of particular – legitimate – ICOs can be a problem. Underfunding happens when a project is not able to collect enough money, and whereas this can be a good opportunity for a smaller number of people to reap larger profits, it can also mean a project will simply never be completed, and investors will lose all their money. Paradoxically, however, overfunding can also be an issue: FOMO can cause huge numbers of investors to buy into a particular project in this early stage, which means there is very little demand left once the cryptocurrency actually hits the market, after the ICO is complete. At this point, prices may stagnate, and investors will lose their potential profits.