Cryptocurrency is a field of finance that many people are only learning about
right now, a decade after it was first created. Those who are just learning
about these digital coins that can act as both currency and investment are often
confronted by a lot of terminology and even more initialisms. One of those
initialisms, ICO, tends to turn up extremely often these days when it comes to
any kind of news about cryptocurrency.
ICO is short for initial coin offering, and at its most basic level, it’s
just what it sounds like. An ICO takes place at the beginning of the life of
some cryptocurrency coin and is used as funding to help the process get
underway. When done correctly and with the best intentions, it can be effective
both for the issuer of the coins, who gets much-needed capital for their
operations, and for the receiver of the tokens, who can get in on the ground
floor of an extremely valuable investment.
Yet not all ICOs are foolproof. Many are no more than an excuse for someone
to try and drum up some money for a project that hasn’t been very well
considered. Others might be the work of scammers using the bright shiny object
of cryptocurrency to distract well-meaning investors and bilk them out of their
In addition, ICOs represent a bit of a gray area when it comes to regulation.
Many go off without a hitch, but some have raised the hackles of lawmakers and
financial watchdogs who worry that these coins are getting away with something
that would result in a penalty for a traditional company. Examining the world of
ICOs and looking at the good and bad will help you decide more clearly if it’s
something for you, whether you are the one raising the funds or the one
investing in them.
There is no understanding how an ICO works without first understanding
the basics of cryptocurrency. Cryptocurrency is essentially a kind of
currency that is traded in the digital space and doesn’t need any oversight from
a third party to make a transaction happen. It is, for the most part, a
decentralized market, meaning that the coins aren’t created by some large group
like the government or a company.
If anything, the coins are meant to bypass governments completely. They are a
peer-to-peer currency, designed to put financial control back in the hands of
the people rather than being dominated by big business. And because they are
governed by the laws of supply and demand, they also rise and fall in value
almost as a stock might.
IPO vs. ICO
Perhaps the closest thing to an ICO in the traditional financial world is an
IPO, or initial public offering. An IPO is when a company goes through a round
of fundraising by offering stock to the public. An ICO is similar, only digital
tokens are what are being sold to investors.
An IPO has to go through strict regulatory oversight before it can be
implemented. It is also usually first offered to institutional investors such as
funds or investment firms. As a result, regular investors, sometimes called
retail investors, only get to the stock on a second-hand basis, at which point
the bargain prices are mostly gone.
By contrast, an ICO is a largely unregulated process because cryptocurrency
as a whole is largely unregulated. Some nations have cracked down on the
cryptocurrency market and everything attached to it within their jurisdictions.
But for the most part, it is a kind of anything-goes atmosphere at the moment
within the cryptocurrency realm, and ICOs fall under that umbrella.
The Process of Conducting an ICO
Cryptocurrency has been booming over the past few years. Even though the
prices have come down somewhat from their all-time highs hit in 2017, they still
are much higher than when they began at the end of the last decade. For that
reason, the market for the coins has drawn an increasing number of entrepreneurs
trying to get involved with the next big thing, almost like the internet craze
of the early 2000s.
In many cases, a cryptocurrency project starts with an idea but very little
funding. That is where an ICO comes into play. It can give the creators of the
new coins a financial boost that they might not be able to secure via
traditional financing such as venture capitalists or seed investors.
To begin the process of luring investors, the creators of a specific
cryptocurrency project or company must create a white paper. A white paper is a
document that will be posted on the website of the project that shows exactly
what the plans for this particular coin are. That means that it should detail
the technology behind the coin, the niche it will fill in the market, and any
other pertinent information that will separate it in a positive fashion from the
hundreds of other coins available.
The creators of the cryptocurrency in question must also go about marketing
this ICO so that investors will know where to find it and what it is all about.
This usually requires a social media campaign aimed at cryptocurrency
enthusiasts, an attempt to get the coin included on websites that publicize
ICOs, and any other method of publicizing the time when the coins will go on
Investors who wish to buy the coins are often asked to do so by paying with
Bitcoin and Ether. These are the two most popular cryptocurrencies in the
market. (Some ICOs allow traditional currency as payment as well.) A price is
set for the coins, and the transactions take place via the blockchain network,
which is the technology that drives the large majority of cryptocurrency
The creators of the coin get the funding they desire. Meanwhile, the
investors can use the coins in one of two ways. They can either use them on the
newly-created crypto network or in society to reap the benefits that the coin
offers. Or they can hold onto them and hope that the price of the coins
eventually goes up, giving them a solid return on their investment.
ICOs and the Prospect of Regulation
As stated above, the cryptocurrency market, for the most part, has been able
to avoid any concerns of regulations up to this point. But those salad days
might be coming to an end. If nothing else, institutions like banks and
governments see the value in the coins and the functions that they perform. They
are trying to bring the coins from the fringes of society into the mainstream.
One of the biggest debates about cryptocurrency is whether or not the coins
that are issued should be labeled as securities.
Stocks, for example, are securities and are strictly regulated. That regulation is what permits them to
be traded on the world’s biggest exchanges.
What regulators are coming to terms with is how cryptocurrency falls
somewhere in between two realms. Many coins can be used within the
cryptocurrency network and for routine applications. Consider the way that
Bitcoin can be used as a payment system, or how Ether, the native coin of the
Ethereum blockchain, can be used to create or even partake in decentralized
But if a coin is nothing more than something that is meant to rise and fall
in value, like a stock, then it could be considered a security. Once that
happens, regulatory bodies will crack down on ICOs and make sure that the
projects that they are funding actually do have some merit and aren’t just
investor bait. It also remains to be seen whether regulatory bodies will take a
stand on all cryptocurrencies or decide separately on a coin-by-coin basis.
How an ICO Benefits a Cryptocurrency Undertaking
The funding is the obvious draw for those creating cryptocurrencies who
decide to initiate an ICO. But it goes beyond that. If an ICO goes well and
draws a lot of positive attention to the coin in question, it is a marketing
boost that the creators likely couldn’t have managed in any other way.
For the cryptocurrency projects with noble intentions, it is also a way for
them to be connected to individuals who really have a vested interest in seeing
the entire cryptocurrency realm move forward. And by staying away from the
traditional funding powerhouses like banks or large firms, the cryptocurrency
project can remain independent from centralized bodies.
How an ICO Benefits Investors
In some cases, the benefits can come from how the coins can be utilized.
Cryptocurrency, as a whole, benefits when the coins are actually put into
practice by people in real-world situations. An ICO can help to encourage that.
There is also the potential financial benefit. In the case of new
cryptocurrencies, investors can get in on a lower level where there is still a
lot of room for potential growth. That isn’t the case for those who are trying
to buy into established coins like Bitcoin or Ether,
since the prices for those coins are often prohibitively high.
TThe average retail investor can also feel good in knowing that
cryptocurrency, for once, gives them the advantage over the banks and other
financial entities that dominate the scene. Cryptocurrency tends to go to retail
investors first, which is just the opposite of what happens with most other
Warning Signs for ICO Investors
ICOs can definitely be an excellent way for newcomers or enthusiasts to get
involved with a potentially great coin and also add to an investment portfolio.
But the unregulated nature of cryptocurrency can also cause some headaches along
with yielding some benefits. Those headaches are generally caused by the fact
that not all ICOs are on the up and up.
Luckily, there are certain signs that you can spot that will help you avoid
an unscrupulous ICO. You need to heed these signs. Once you have paid for coins,
there is really no way that you can get your initial investment back in the way
that you might if you were dealing with a regulated investment.
Poorly Conceived Websites
If you head to the website of a potential coin and see some obvious flaws,
that is an immediate red flag. Poor grammar or weird links are signs that the
people who put it together weren’t worried too much about the long haul of their
project. They were likely only to draw people in with empty promises, which is
another warning sign.
A cryptocurrency project should be about what the coins can bring to the
table in terms of their usefulness. The emphasis should not be placed on how the
coins are going to get you rich. That is a sure sign that the originators of the
coins are making promises that they can’t possibly keep.
If you see on their website marketing copy promising that you will make a
high percentage back on your investment in a short time, you are probably
looking at a scam. Not even the most tried and true investment assets can
promise any return. Also, be wary about copy that claims that you will be
entered into a higher tier of investment if you pay more money.
At some point, you should really check out the white paper of the project at
hand to see how it stacks up against competitors. You will see many coins on the
market claiming that they can do everything that Bitcoin or Ethereum does, only
better, cheaper, and faster. Yet these coins are going to go up against the
established titans of the market and will likely be left wanting.
It is better to hone in on a coin that seems technologically sound and
addresses some corner of the market that hasn’t yet been well-trod. That should
give you a fighting chance at investing in a coin that can indeed break through
and attain the upper reaches of cryptocurrency.
There is still a lot of uncertainty in the cryptocurrency market as pertains
to ICOs. Some clarity might be coming soon, but it is still a situation where
you should enter at your own risk.
As an investor, that means doing a lot of due diligence to make sure that
your new coins are everything you hoped they’d be. And for a cryptocurrency
entrepreneur, that means understanding everything the ICO process entails before
you go forward into uncharted territory.
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