If you are tuning out the noise in the blοckchain industry, as well as educating yourself on crypto, you might have come across the notion of “initial coin offering”, also known as ICO. But what does it mean? Is it the same as trading popular coins like Bitcoin?
When new projects need to raise money to launch a new token, application, or portfolio of services, they often apply an ICO as a possibility to pool funds from investors. ICOs, taken place successfully, bring tremendous rewards to early investors. However, it’s highly essential to be careful when participating in such projects. Currently, an ICO is out of law remit, and given its decentralized model, it is often subject to being used by persons engaged in fraud to cheat investors.
If you are keen on taking part in an ICO or you just want more details, read on.
What is an ICO?
This is an easy-to-implement option for crypto startups to collect capital for their growth. Generally, collected funds can then be applied by the project in the blockchain climate to produce a new cryptocurrency, app, or service. ICOs are the analog of an initial public offering (IPO) that many traditional businesses use to get financed.
Stakeholders can purchase cryptocurrency issued by the project. Similarly to an IPO, ICO can be considered a type of stock. This is not an exact juxtaposition, as it is often the case that the ICO itself presents utilities for a service or product proposed.
The lion’s share of ICOs has brought brilliant gains for their participants. The other side of the picture, however, shows that other ICOs have appeared to be a scam. Just as with an IPO, an investor could be engaging early in a company, or they could be cheated, or the startup might just turn out to break. This is one of the jeopardizing things of early investment.
The ABC of ICO operation
When a startup intends to collect funds via ICO, it, as a rule, draws up a White Paper for the offerings. This will disclose what are the main objectives, how much funds are sought, what benefits the investor receives from it, etc.
If you want to join an ICO offer, you will have to acquire the project’s tokens. This is possible to do with other virtual, or with fiat currencies. For this purpose, you need to be aware of the basic principles of how to work with crypto wallets and exchanges.
If the ICO is failed and a non sufficient amount of money is collected, the money may be returned to the investors. If everything went well, the money collected will be applied to implement the objectives of the projects.
What to consider before investing in ICOs
If you are keen on the opportunity to take part in an ICO, be mindful of the following:
- Establish an e-wallet and exchange account;
- Keep yourself tuned in the latest ICOs and thoroughly learn the white papers;
- Consider your investment plans.
ICO Pros and Cons
There are a number of pros and cons of an ICO to take into consideration prior to contributing money to one.
In a public offer, an investor gets shares of a company for their investments. In the ICO, there are no shares by their very nature. In lieu, startups collecting money via ICO offer a blockchain analog to a share—a crypto token that by itself does not feature any intrinsic value.
If the project thrives, the value of the tokens bought during the ICO will be enlarged several times. The perfect way for an investor is to purchase the coins when the company is just started operation and sell them at higher prices once the company gains success.
But the prospects for high returns also refer to likely interaction with scam. Given the fact that ICOs are out of regulation, they are not challenging for con men to establish scam projects and cheat investors. That’s why you always need to familiarize yourself with information showing details about the project, check whether project objectives are clearly defined, thoroughly learn the legal terms and conditions, and ensure you are applying a secure wallet.
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