The word ‘’ICO’’ is actually an abbreviation that stands for ‘’Initial Coin Offering’’ and it’s a unique fundraising mechanism in which new projects sell their underlying cryptographic-based token to a group of Investors in exchange of more popular cryptocurrencies like Bitcoin, Ethereum or Litecoin.
A Business that wants to raise money, can simply host an ICO as a fundraising tool, by issuing their own Cryptocurrency or token (e.g ERC20) in exchange for more immediate & liquid valued digital currency.
An example would be a Company that issues ‘’FUNDME’’ token to investors, who have the option to buy into the ICO using Bitcoin. During a set period of time, the Company will collect as much Bitcoin possible or reach a ‘’Hardcap’’ of a certain limit, once that target is achieved, the Company will begin issuing out the ‘’FUNDME’’ tokens. The Company can now sell the accumulated Bitcoin for Fiat currency in order to fund day-to-day business operations whereas Investors get the ‘’FUNDME’’ token in return for their investment
ICO “coins” are essentially digital coupons, tokens issued on a distributed ledger like via an Ethereum Smart contract, or featured to be it’s own unique blockchain based protocol.
Is an ICO basically like an IPO?
If you know what an IPO is, then by now you might assume an ICO offers an alternative method for fundraising capital. It’s quite common for individuals to compare ICOs to Initial Public Offerings (IPOs) of corporations.
While they have notable similarities, it’s important to note that unlike an Initial Public Offering (IPO), investing in an ICO won’t result in you having an ownership stake of the company you’re giving money to.
Cryptocurrencies are still deemed a relatively new asset class, often categorized as a high-risk investment and poorly regulated Asset around the World. As of right now, investing in an ICO is a highly speculative investment due to the fact that ICO’s lack regulation, which makes it easy for anyone to host an ICO, so investor should be aware of that.
Keep in mind that you’re gambling that the currently worthless digital Cryptocurrency you pay for now will increase in value later, in hopes of making capital gains.
ICO & IPO do have similarities as both of them are used to sell a stake and raise money
In short; ICO are unregulated, whereas IPO are lawyered up and provide you some basic protection. As of right now, a lot ICOs are soon to be classified as ‘’Securities’’ according to higher Authorities, as Governments around the world are keen to create laws in hopes of regulating the Crypto Space
Since Blockchain Technology is decentralized, it makes transfer ownership easy allowing investors to bypass traditional intermediates and the fee’s associated with it.
Cryptocurrencies can easily be traded when compared to Shares via Brokers, although unlike shares they do not confer ownership rights.
ICO a good Investment Opportunity?
Currently, there’s very little regulation on ICOs in America, meaning as long you’ve got a technical understanding, you’re free to try and get your Business funded via an ICO
Please, do a lot of Research before investing in an ICO as the Crypto space seems to have grown accustomed to hacks, fraud and Scams. Expect, ICO’s to become more regulated over time as Government cracks down on this new form of Fundraising