The Risks of ICOs – What to Consider in 2025

The digital financial sphere is changing all the time, and nowadays ICO or Initial Coin Offerings have emerged as a popular fundraising mechanism within the crypto industry.

However, even though ICOs can secure you some big returns, there are some obstacles and potential challenges in navigating these financial avenues.

What is an ICO?

Let’s start with the basics here – you can think of an ICO as a fundraising mechanism where new cryptocurrencies are put on sale. Investors buy them in exchange for legal tender or other cryptocurrencies.

This is something that has been popular in the crypto world since the beginnings of blockchain technology. So, to run an ICO, a company must sell its tokens to the public. The company will usually publish a white paper describing its plans and uses for the ICO proceeds.

Due to the fact that ICO documents are not prospectuses, they won’t include all the information and important details you should know before investing.

You can then buy an ICO with other cryptocurrencies and you get a digital coin that has a wide range of uses. For example, you can use that coin to buy a company’s products or services.

So, Where is the Risk For Investors?

On the surface, all of this looks plain and simple, but there is much more when you scratch a bit beneath it. First off, the crypto market is still under-regulated, to say the least. Therefore, investors may be out in the cold on their own if an ICO turns out to be a fraud or if it fails.

You should know that neither of these situations is uncommon, so there is no central authority to turn to – you only rely on your knowledge and hindsight when making such decisions.

Even though ICOs have existed for some time now, we can still consider them an unproven business model with a high risk attached as a result. Moreover, as explained above, there is limited transparency regarding the project and potential issues, so you might be in for some unpleasant surprises!

Lastly, as everyone seems to be hyped about ICOs, that excitement may surpass its utility – the value of ICOs can often be speculative and subject to fluctuations.

What About the Issuers?

On the other side of the spectrum, we have the holders of an ICO. They also share a burden of risk as they can end up trapped by financial regulations and risk fines, or even sentences.

For example, China banned ICOs and exchanges in 2017, which resulted in ICOs being delayed or moved.

Other risks investors face in regards to ICOs are:

• Regulatory differences between utility and security tokens
• Volatile investment currencies
• Potential to issue the wrong documentation in some regulated countries
• No information about the token holders
• Holders are responsible if the project’s security is threatened.

Of course, there are extreme cases of ICO teams simply running off with investors’ money, but all these risks do not mean that ICOs are natively wrong and that you should avoid them. You will encounter more than decent projects, but you should always consider the risks before investing big chunks of money.

Recognizing Bad ICOs

Now, let’s shift our focus to the million-dollar question – how you can recognize if an ICO is fraudulent one?

There are never any guarantees with ICOs, but there are some red flags you need to look out for:

• Who owns the project – if you have any doubts about the people running the project – for example, their identity – then stay away;
• Professionalism – you know that the team is legit, but if there is no experience to back it up, you are better off without it;
• Legality – if there is no legal entity behind the ICO, you shouldn’t consider it;
• Too rosy – if the white paper sounds too good to be true, then it probably is;
• No working prototype – pretty self-explanatory, it should be a big red flag;
• Transfer of funds – if there is no escrow wallet, then the ICO is not good;
• PR – finally, always be on the lookout for credible media mentioning the project.

As you can see, investing in ICOs is not a walk in the park. You have to do your own research – only that way, you can improve your decision-making on whether the ICO is credible or not.