What is an Initial Coin Offering (ICO)?

initial coin offering

Initial Coin Offerings (ICOs) are popular fundraising methods being used by startups seeking to offer products and services. Also referred to as Initial Currency Offer, these are financing systems more commonly used by cryptocurrency projects. The products and services on offer are mostly related to blockchain ecommerce technology or cryptocurrency. You can participate in ICOs by purchasing digital currency.

What are ICOs and what are their advantages and disadvantages? Find out in this guide.

What is an ICO?

Initial Coin Offering refers to the process of raising funds for a project. While traditional public offerings offer shares, the participants in these projects get coins against their contributions. These coins are electronic tokens or blockchain entries that confirm the investor’s stake in the project.

During an ICO, the startup offers the public an early opportunity to get invested in their idea via a crowded sale. When you invest in an ICO, you will be allocated tokens at a very low price. There is the promise of selling the coins at a higher price once they get listed on an exchange.

Since their conception, ICOs have generally been seen to be successful. Many tokens have offered several times the value of their promised returns. Does that mean that you should invest in every ICO that you come across? No, you cannot afford to do that.

ICOs draw a large number of cryptocurrency investors because of their promised high returns. At the same time, an equally large number of these offerings have turned out to be nothing more than scams. Many investors have lost millions by choosing offerings that didn’t turn up the desired results.

You have to be careful with these investment instruments. You have to determine which ICO to invest in and when.

You can do this with some research and hard work:

  • Do a background check on the startup or team behind a project
  • Determine their project’s prospects of delivering on the promised return
  • Read the project’s white paper and ask questions

When it comes to ICOs, it is important to take your eye off the promised returns and look at details that most investors will usually overlook. Having completed research on the project, if you still seem to have doubts about it, it is best to pass on it.

Advantages of Initial Coin Offerings

There are many features that make ICOs a good investment option. The allotment of tokens means that you will have instant custody of coins without any intermediaries. The ICO coins are similar to cryptocurrency coins in that you can subdivide or consolidate them. These coins also provide the same degree of anonymity and can be sold or purchased at blockchain technology behind bitcoin.

Some of the key advantages that ICOs offer over equity holdings can be summed up as follows:

  • There is transparency in how the funds are used. You can use an escrow to check where the funds are being spent.
  • Getting early access to a token, which increases the potential for quick growth.
  • You can have greater liquidity in an early-stage company as an early contributor.
  • A creative way to invest capital that provides a hedge against economic and political factors.
  • The advantage of being the first users of the token. This is different from holding a stock of a company. Investors usually have not used a company’s products. Thus, tokens can seem to be more tangible than stocks.
  • Investing in an ICO that uses existing blockchain such as Ethereum, usually translates into greater reliability.
  • The ROIs are usually several times the promised returns.
  • Access to a high-risk and high-reward asset that is not connected to the economy and stock market.

Besides, ICOs allow you to own an alternative asset that is not based on standard currency.

Disadvantages of Investing in ICOs

Many investors believe that their investment in ICOs will yield them quick returns. The best ICOs have actually helped their investors achieve exactly that – huge returns. However, a significant percentage of these initial token offerings are scams.

Initial coin offerings are mostly unregulated and ill-informed investors can easily become victims of scams. And any funds lost in these camps cannot be recovered.

ICOs also have a track record of being easy to hack. The lack of regulation and centralized authority, poorly informed investors, and irreversibility of blockchain transactions attract the attention of hackers. From 2015 to 2017, over $400 million in funds were lost or stolen by hackers.

If you want to invest in ICOs, do it with care. There should be complete transparency of the company running the offering. Store your ICO funds in your escrow wallet protected by multiple keys. Initial coin offerings are also similar to IPOs. The only difference is that they offer digital currencies. So, follow the tips mentioned here to ensure you are making the right decisions and looking forward to promising returns.

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