A Complete Explanation of ICO's
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 money.
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.
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 sale.
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 projects.
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.
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 applications.
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 investment assets.
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.
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.