By Steven Krohn · October 9, 2017
As cryptocurrencies are gaining traction these days, the term ICO is certainly a term you will be hearing more often. So “what’s an ICO?” you may ask. That’s exactly what we are going to cover in this article.
Definition Of ICO
ICO is short for Initial Coin Offering. If you have been reading the financial section of any major media, you probably have come across the term IPO or Initial Public Offering. If you don’t know what an IPO is, it’s the first time a company sells their stocks on the public market.
Initial Coin Offerings are very similar as it’s the first time a cryptocurrency is being sold to the public. That said, the similarities of IPOs and ICOs end there. Initial Public Offerings are heavily regulated while Initial Coin Offerings are not regulated.
An Initial Coin Offering is an attractive way of raising money for a cryptocurrency venture because of the lack of regulation of the industry.
Traditional start-ups usually go through rigorous and laborious capital-raising processes. Only then can one even think about approaching banks or venture capitalists. You can bypass it all through the use of an Initial Coin Offering.
Initial Coin Offering – How It Works
When a cryptocurrency firm makes the decision to raise capital through an Initial Coin Offering, the process normally starts by creating a White Paper which would normally include the following:
* What the firm’s project is all about
* What project is ultimately trying to achieve upon the completion
* How much the project is going to cost
* How much “virtual money” the originator and start-up personnel will keep,
* The type of money that is accepted
* How long the ICO campaign will last
During the ICO campaign the supporters, believers, and enthusiasts of the cryptocurrency will try to purchase the firm’s “tokens” with virtual or other forms of currency. These “tokens” serve a similar purpose as stocks do in an IPO.
If the firm can meet the minimum funding requirements within the scheduled time frame then the firm will continue with the project. On the other hand, if the funding requirements fail, the money is returned and the attempt is deemed unsuccessful.
Why Initial Coin Offering Are Worth Your Time
We are not going to sugarcoat the risk factor associated with Initial Coin Offerings. In short, ICOs are risky. On the other hand, the reward can very much outweigh the risk. This is the reason why Initial Coin Offerings are gaining popularity.
Here is an example to demonstrate the scenario:
Imagine you have $10. For simplification purposes, you bought 10 coins from 10 different cryptocurrency firms during their respective ICOs. Basically, that’s $1 for one coin from each cryptocurrency firm .
Over the course of time, 9 of the 10 firms were not successful resulting in a loss of $9. That said, the last firm is a big success while the value of each “coin” is now $100.
Let’s back-up a bit. Again, you lost $9 from the other firms. However, you gained $100 on that one successful firm. That brings your total earnings, or profit, to $91 ($100 – $9).
A Real Life Example
What we illustrated above is an imaginary scenario. Hence, let’s look at a not-so-familiar story. Back in 2014, the Ethereum project was publicly and formally announced. During the Ethereum ICO, the firm raised about $18 million worth of Bitcoins. At that time, each Ethereum had a value of approximately $.40.
The Ethereum project met the minimum requirements on schedule, so it went public by 2015. By 2016, the Ethereum gained a lot of popularity and traction, which increased the value of the each Ethereum to a high of $14!
If your jaw didn’t drop, we’ll slow it down a bit. If you have invested $100 at Ethereum’s ICO, the value of your money would have reached a high of $3,500 in less than two years.
As you can see, even though the risk of Initial Coin Offerings is high, the reward is astronomically high. Thus the reason numerous investors are getting into the Initial Coin Offering market.
It’s also worth noting that since Initial Coin Offerings are largely de-regulated, it’s always possible that you can be scammed out of your money with no legal recourse. The good news is, due to the de-regulation of cryptocurrencies, you don’t need any specific qualification or requirement to buy virtual coins.
It is recommended that you only invest money you can afford to lose when investing in an ICO.