What is an ICO?

What is an ICO?

Cryptocurrency has been a hot topic over the past year, especially with the prices skyrocketing and crashing in spectacular fashion. If the price of established cryptocurrencies such as Bitcoin and Ethereum are putting you off from investing, you may want to consider looking into initial coin offerings (ICOs). It gives you an avenue to get in cheap, which could pay off in spades if the company does take off! Here are the key things you need to know about ICOs.

How it works

Unlike an initial public offering (IPO) where you buy a stake in the company, an ICO means you are buying the digital currency of the company in question at a set price in the hope that it will increase in value over time.

The company in question will usually outline its project goals in a whitepaper. This is the key document that potential investors will pore over, which should outline what the currency does that has not been done in the past, or how it can improve upon an existing product or idea better than any competitors. Whitepapers will also have a roadmap, which is a detailed plan of a timeline that the company plans to follow, as well as visions and future goals.

In the case of Everus, a private ICO was conducted, meaning that investment opportunities were available to selected investors only, and not the general public. Another good example of a private ICO was the one conducted by messaging app Telegram, although it was not their initial plan. The first round of funding among private investors raised an eye-catching US$1.7 billion, resulting in the company deciding to scrap the proposed public round of funding.

Are ICOs Legal?

Some governments have begun taking proactive steps to ensure that ICOs fall under their jurisdiction, due to the sheer number of projects sprouting up. In many countries, ICOs exist in a gray area due to the fact that they cannot be classified or declassified as a new form of financial assets, albeit unregulated. Although many companies organize ICOs with good intentions, the increasing number of poor quality projects have left a stain on the industry, leading some governments to actively step in.

Governments in several countries have begun setting regulations and standards that future ICOs must adhere to. Image from news.8btc.com

It can be argued that regulation will curb the number of ICOs in the market, due to the increased standards of what is expected and what should be delivered. However, most will agree that this is necessary to ensure that projects seeking to raise funds in this manner are legitimate and are not just scams.

Should I Invest in ICOs?

One example of a truly successful ICO is Ethereum. Back in 2014, 1 Ethereum was selling for 0.0005 Bitcoin, but at the time of writing, it is currently trading at 0.08 Bitcoin – a gain of almost 170x! On average, successful ICO tends to give returns of around 100% to 500% but this is a subjective figure and will vary from project to project.

Ethereum is probably the most successful and well-known ICO to date. Image from asia.finance

If you strongly believe in a project’s vision and goals, and have a sizeable risk appetite, then investing in an ICO might be a suitable option for you. However, it is imperative that you research as much as you can about the company, key staff and its direction within the industry. This will give you the information needed to make a calculated decision. You should also follow the golden rule of investing, which is to only put what you can afford to lose, which applies to any form of investment!

Disclaimer: This article does not intend to provide, and should not be taken as financial or investment advice. You should conduct your own research thoroughly, and are responsible for any investment decisions you make.

Cover image from bitcoinmagazine.com

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