Crypto News: As the cryptocurrency world is becoming more popular, you'll need
to become conversant with the words and terms that are related to the industry.
One of the most important ones is initial coin offering, popularly known as
ICO. So, what is an ICO?
An initial coin offering is an unregulated means used by a new
cryptocurrency venture to raise funds. With an ICO, startups can by-pass the
regulated and rigorous process of raising capital, which is often required by
banks or venture capitalists. In most initial coin offering campaigns, a
percentage of the cryptocurrency that's being invested in will be sold to the
early supporters of the project in exchange for other cryptocurrencies (mostly
Bitcoin) or legal tender. An ICO can also be referred to as an IPCO, Initial
Public Coin Offering.
INITIAL COIN OFFERING BREAK DOWN
In order to further understand what an ICO is, we have decided to
break it down for you. Now, when a new cryptocurrency firm wants to raise funds
via an ICO, what they do is create a plan on something known as a whitepaper.
The whitepaper is a document that lets contributors and supporters know what
the project is about, the amount needed for the execution of the project, what
the project will take care of when it's completed, the time period the initial
coin offering will run for, the type of money accepted, and the amount of
virtual tokens that will remain in the "purse" of the project
pioneers.
During the ICO campaign, supporters and enthusiasts of the firm's
project will be able to purchase some of the distributed cryptocurrency with
other virtual currencies or fiat money. These cryptocoins that are available
during the ICO campaign are known as tokens, and they can be likened to a
company's shares being sold to an investor during an IPO (Initial Public
Offering) transaction. Now, for an ICO, if the money raised is not up to the
minimum amount that's needed by the firm, the money is given back to the
supporters and the ICO is considered to be unsuccessful. But if the money is up
to the required amount, the funds will either be used to start up the new
investment or used to complete it.
ICO supporters are usually of the mindset that the plan will
become successful (no one wants to lose their money after all) and after the
launch of the cryptocurrency, the coin's value will surge higher than what they
actually bought if for before the initiation of the project. One good example
of a successful ICO is the Ethereum project. Ethereum had Ether as its coin
tokens and those who had supported and invested early in the smart contracts
platform are quite profitable now. Introduced in 2014, the Ethereum project
kicked off with an initial coin offering where Ether was sold at $0.04 per
coin. The project raised a whopping eighteen million dollars in Bitcoin during
the ICO and it went live in 2015. In 2016, Ether had a value of $14 per coin
from 0.04. Ether is now worth over $700 (in 2017) with a market cap of 92
billion dollars.
THE DIFFERENCE BETWEEN INITIAL COIN OFFERING AND INITIAL PUBLIC
OFFERING
As we noted earlier, ICOs and IPOs are quite alike. Both of them
are similar to crowdfunding. Just like an IPO, an ICO also involves a part of
the company or startup being sold in order to raise money for the operations of
the entity. However, ICOs deal with supporters and enthusiasts that are eager
to invest in the new project just like crowdfunding, while IPOs deal with
investors. But ICO also differs from crowdfunding given the fact that the
enthusiasts and supporters of ICOs are expecting returns on their initial
investment, while those involved in crowdfunding are actually donating with no
prospective returns. These reasons are why ICOs are considered to be
crowdsales.
Now, although there have been a lot of successful ICOs over the
years, you still need to be careful before investing your money in one. ICOs
are considered to be disruptive innovative tools in this technology age;
investors need to be careful as some of these crowdsales (or ICOs) are actually
scams. Since initial coin offerings are not regulated by financial authorities
like the SEC (Securities Exchange Commission), any fund lost to an unsuccessful
or fraudulent crowdsale may never be recovered.
As a matter of fact, in September 2017, China's central bank, the
People's Bank of China, banned ICOs, claiming that they are disruptive to
financial and economic stability. According to the central bank, it claimed
that banks cannot offer services that are related to ICOs and tokens cannot be
utilized as currencies on the market. This brought about the tumbling down of
Ethereum, Bitcoin and other cryptocurrencies, and it has led market analysts to
believe that the cryptocurrency world will soon be seeing different
regulations. The ban also applies to already complete offerings, which is why
it had a major effect on Ethereum and BTC.
SUMMARY
ICOs are a great way to invest in a startup, but you also have to be
careful about the ones you choose to invest in. Look for red flags and read the
whitepaper well before investing your hard-earned money.
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