Looking for fundraising tools and token offering methods can be frustrating. Especially if you are just getting to know your options. With the rise, boom, and fall of ICO still in the memory of the majority of cryptocurrency industry players, it’s hard to trust whatever else the project developers seem to be coming up with.
With a big number of investors trying to earn money on new projects and a huge number of project starters looking for investors, the collaboration scheme doesn’t seem to be complicated. However, the number of nuances and fraud possibilities has forced all the parties to be more careful and look into new options.
Which option is the best for you? If you are asking this question, you probably know how problematic the process of investing can be. Before you go into buying tokens or coins, it’s important to know how you can protect yourself from making a mistake.
Any investment is always a risk. But you can minimize it by exploring the possibilities and learning which ones are right for you.
Cryptocurrency and blockchain projects raise funds using three most popular methods. They are ICO, IEO, and STO. All of them have their own advantages and setbacks, which you must learn before choosing. Anyone of these options may be suitable for your needs. However, it’s vital to assess the risks before taking advantage of them.
1. ICO — Initial Coin Offering
In 2017, ICO was on the peak of its popularity. However, several cases of fraud have caused investors to be wary of this option.
ICO is a way to raise funds for the launching and development of blockchain projects. Investors offer their funds, the project developers offer crypto coins and tokens. These coins and tokens are used on the blockchain where the project is being developed.
The most attractive part of ICO is a low minimum, which needs to be invested in order to participate in the project. It attracts amateur investors, small companies, and coin owners, who simply don’t know how to make money with their funds.
ICO works fine as long as you manage to find a respectable project developer. The success of the project depends on the people working on it. With ICO, you never know how ready people are to do their jobs.
It’s up to the investor to research the project developers and find out how credible they are. The investor has to evaluate the chances of the project becoming successful while having a very minimum of information. Sounds like a gamble, doesn’t it?
Meanwhile, according to CoinSchedule, the ICO method raised more than $37.5 billion between 2017 and 2018.
Some experts note that many similarities exist between ICOs and the stock market’s IPOs. However, ICOs don’t have any assets to back them so they are hardly traditional securities. Even though you invest in a coin at a very low price while hoping to get considerable profit, you can’t consider it a security. That’s why ICOs are banned in many countries.
The major downside of ICO is a possibility of fraud. An ICO is easy to create. Money is easy to collect. But who can guarantee that the project will go forward? No one. That’s why many investors are moving away from ICOs and considering IEOs.
2. IEO — Initial Exchange Offering
As the number of successful ICO frauds has risen, the crypto community has come up with an Initial Exchange Offering. The main difference between ICO and IEO is the appearance of a third party. The exchange. The sale of crypto tokens is done on an exchange platform, thus bringing another player into the game. The funds aren’t sent to the smart contracts as they are during an ICO. Everything is done through an exchange.
In order to participate in an IEO, both parties have to create accounts on the particular exchange. Investors can buy the IEO tokens using their cryptocurrency.
The main advantage of an IEO is that the exchange takes care of the transaction’s security. Before allowing the IEO to start, the exchange checks the credentials and evaluates the chances of a project becoming successful.
The exchange experts regulate the IEO, creating a high degree of security to investors. The key security offering is the direct exchange of fund and tokens. The exchange makes sure that the coin matches the requirements to keep the risks to a minimum.
According to experts from experts from IBCGroup, IEO is a preferred method for the majority of investors.
The downside of using an IEO are high investment minimums, a small choice of IEO platforms, and the necessity to create accounts on the exchange.
3. STO — Security Coin Offering
Security coin offering is the most difficult and complex fundraising scheme for both investors and project starters.
STO creates an investment contract, which gets its backing from security tokens operating on a blockchain. Unlike ICO and IEO, the security tokens here are backed by assets, which turns them into real securities. These security tokens have a legal certificate of ownership, which is recorded in the blockchain.
Making an investment by buying such tokens is similar to investing using real stocks and bonds. Overall, security tokens are crypto securities. They are secured by KYC-AML processes and other regulatory protections.
Since tokens are protected by “real life” security, STO keeps small and amateur investors away. Such tokens can only be purchased by accredited investors.
STO is the most expensive fundraising method of the three.
ICO vs IEO vs STO: Which One Is The Best
Each investor should consider his or her abilities before choosing one of the three methods. ICO is for cheap investments with fast cash out options. IEO is good for investors looking for better security and more serious investment opportunities. STO is for investors with large budgets, who prefer familiar real-life structure in the crypto investment industry.
It’s up to the investor to make the final decision depending on the time, resources, and potential risks.