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What is an Initial Coin Offering (ICO)?

Initial Coin Offerings (ICO) are the hot new way to raise funds for new cryptocurrencies, but what are they?

Written by Starttrading.com

 

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If you’ve been kicking yourself for not getting in on the ground floor of top cryptocurrencies such as Bitcoin and Ethereum, you might want to consider looking into investing in an Initial Coin Offering. An Initial Coin Offering commonly referred to as an ICO, is a fundraising mechanism in which new projects sell their underlying digital tokens in exchange for bitcoin and ether.

 

Investing in ICOs

Whereas Bitcoin primarily focuses on payments and moving money between ecosystems, ICOs support companies with almost limitless applications. Here’s how it works, a document is created essentially detailing exactly how the system would work and why it’s a great idea that could be very useful, usually called a white paper. Then, people are asked to send money, usually, Bitcoin or Ether, but also traditional fiat currencies, and in return investors are returned with the new cryptocurrency or virtual token created. Investors hope that the new cryptocurrency will get used a lot and be in high circulation, which would, in turn, raise the value of the currency.

Most ICOs work by having investors send funds, usually bitcoin or ether, to a smart contract that stores the funds and distributes an equivalent value in the new virtual token at a later point in time. It’s important to note that unlike an Initial Public Offering, also known as an IPO, investing in an ICO won’t result in you having an ownership stake of the company you’re giving money to. You’re gambling that the currently worthless currency you pay for now will increase in worth later and make you money.

When investing in ICOs, you often have the option to become part of the development of new, upcoming technology. They often have a network of supporters already in place, which means the investment is already in a much stronger position to see faster growth. ICOs offer the opportunity to see gains much quicker and can take profits out of the company invested in more easily.

The success of an ICO is influenced by many aspects. Despite being a relatively new fundraising model, popularity has rapidly increased in recent years. As many of the ICOs are based on new blockchain technology, you need to have a thorough understanding of what you are putting your money into, as well as your financial requirements and understanding of the investment landscape. As with any investment decision, buyers and sellers need to find out as much information as possible – establishing both the positive and negative points.

What’s the difference between ICOs and IPOs?

How is buying a token different from buying a stock? Although the concepts are very similar, ICOs and IPOs differ significantly in terms of their mechanics and regulatory frameworks. IPOs are developed and organised by established private companies who are looking to start selling shares in the public domain. On the other hand, ICOs are organised by startups to raise seed money. This investment will not result in the individual having an ownership stake of the company, instead, it is an opportunity for the token to gain value over time.

The startups often don’t have a product ready, so they conduct ICOs based on their product idea and utility. When conducting ICOs, there are not many strict regulatory guidelines to stick to and they are not restricted by international borders. Usually, a percentage of the tokens is sold to ICO participants and a percentage kept for the company’s needs – which allows investors to fund the projects they like.

When investing in a stock you are purchasing a piece of the equity and operating company. Anything the company does such as cash flows or profits, you own a portion of that. Fundamentally tokens are different. You are not buying part of the company, you are buying the money supply of the future technology project. For example, a future casino being built, and the owner wants you to invest in the casino chips before the finalisation of the casino. This is similar to token sales; the team wants you to buy the tokens before the creation of the technology and platform. If the technology or platform is well used, the value of the tokens will correlate with the value of the company.

How to choose an ICO to invest in

When looking for quality ICOs to invest in, it is important to find a strong development team, preferably individuals with cryptocurrency experience, who can exhibit past successes. The white paper is also a crucial aspect of your investment, as this is what describes every aspect of the project itself. This includes the initial concept, the technology behind it, as well as the circulation of tokens and how they will be used. This crucial information will help you understand the logistics behind the project, helping you to become part of exciting future technology advances.

There are plenty of other techniques when it comes to evaluating tokens, it’s important that you view our in-depth guide on how to evaluate different tokens like a pro.

What to look out for?

Whereas Bitcoin primarily focuses on payments and moving money between ecosystems, ICOs support companies with almost limitless applications. Here’s how it works, a document is created essentially detailing exactly how the system would work and why it’s a great idea that could be very useful, usually called a white paper. Then, people are asked to send money usually Bitcoin or Ether, but also traditional fiat currencies, and in return, investors are returned with the new cryptocurrency or virtual token created. Investors hope that the new cryptocurrency will get used a lot and be in high circulation, which would, in turn, raise the value of the currency.

Most ICOs work by having investors send funds, usually bitcoin or ether, to a smart contract that stores the funds and distributes an equivalent value in the new virtual token at a later point in time. It’s important to note that unlike an Initial Public Offering, also known as an IPO, investing in an ICO won’t result in you having an ownership stake of the company you’re giving money to. You’re gambling that the currently worthless currency you pay for now will increase in worth later and make you money.

How can we help you?

As an establishment, we are an incredibly dedicated team of individuals who help offer online trading courses for beginners in cryptocurrencies. If you are just learning to trade and want to know how to invest in the stock market and digital currencies, our specialists can guide and support you on your learning journey.

Are you interested in participating in embarking on a course of online trading for beginners? The starttrading.comwebsite is where you need to be. Please feel free to complete the contact form on our website and we will get back to you as soon as possible.

Conclusion 

At the bottom line, ICOs are an incredibly new way of raising money, and everyone is trying to adapt to the new ways without getting screwed over. If you think you’re able to make a killing on a promising new ICO, just make sure to do your homework beforehand. Cryptocurrency is all about high risk, high reward, and ICOs are no different.

Be warned, ICOs are highly risky even under the best of circumstances and have a high potential for scams. How can you tell what’s a scam and what’s real? The first point is that the ICO itself could be a scam or a ponsy scheme.

When looking into an ICO as an investment you need to make sure that there is a solid business plan and a product, instead of some sort of promise of financial gains or rewards. You must ensure that the ICO website or contribution page is the official project page, instead of a phishing page generated by hackers to lure investors into crowdfunding to a 3rd party. Aside from these easily avoidable scams, you need to look out for aggressive marketing tactics, such as paying influencers to positively promote the virtual token.

A lot of ICOs use bots for social media, when seeing information about the ICO make sure the engagement is coming from real followers. Using all of this information when seeing information about the token, highlights the importance of doing your own research and staying sceptical.

Start trading the right way

At starttrading.com, our goal is to empower you to become a more successful trader and unlock financial freedom. We provide you with the information and educational content needed to learn how to trade.

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