An Initial Coin Offering (ICO) is a type of crowdfunding, typically based on cryptocurrency, used to raise capital for a project or company. During an ICO, interested investors typically purchase coins or tokens in exchange for another form of cryptocurrency such as Bitcoin or Ethereum. These tokens can then be exchanged for future access to the product or service being offered.
The risks involved in investing in an ICO vary depending on the specific project, but generally include market risk, liquidity risk, cyber security risk, regulatory risk and fraudulent practices. Market risk means that the value of the coins and tokens acquired in an ICO could depreciate over time. Liquidity risk refers to the potential lack of buyers for the tokens, making it difficult to convert them back into cryptocurrency. Cyber security risk could crop up from possible vulnerabilities in the technology or exchange process. Regulatory risk applies if the project does not comply with applicable laws or regulations. Finally, fraudulent practices are still a possibility, so investors must ensure that the project is legitimate and not a money-making scam.