You’ve probably heard of the term ‘ICO’ being thrown around every time a new cryptocurrency hits the news. Most people would give a smart guess and say that it might have a meaning closer to ‘IPO’, and they wouldn’t be that far off from the truth. ICO stands for Initial Coin Offering, and it refers to an unregulated method of crowdfunding where, instead of getting shares, investors acquire digital assets known as tokens. With the very first one having been held in 2013 for Omni Layer, a lot more have since occurred, and it looks like there’s going to be a lot more subsequent ones happening very soon.
How ICOs Work
The ICO model of raising income has proved itself as a very effective way of putting together much needed capital for startups, with the highest amount ever raised peaking at $257 million dollars for a currency known as Filecoin. Entrepreneurs will probably continue using this proven model probably because coming up with a digital currency & initiating an ICO isn’t as difficult as most people would think. The offerings occur on the Ethereum network since the platform uses the same technology that’s behind the digital currencies.
The technology itself is mainly open source software, and thus it allows for anyone to adopt & alter so as to come up with their own digital currency through the Ethereum Smart Contract; a computer protocol whose work is to ensure the transfer of digital assets between the involved parties takes place without any hiccups. For those that aren’t as familiar with software development, there are a number of companies that are ready to do this for you at a cost.
Once an ICO gets launched, investors are invited to purchase the new coins/tokens through sending the developers Ether or Bitcoin. The difficult part is convincing them that your token is worth buying, as there have been a number of startups that have gone under as a result of being unable to get through this phase.
Differences Between IPOs & ICOs
The main differences between the two are that:
- ICOs do not depend on the stock market as a dictator of value. There’s also not as much paperwork when dealing with ICOs.
- It’s quite possible for you to raise more money with ICOs than you would through venture capitalists or capital markets.
- Most of the projects behind ICOs haven’t really reached completion by the time of offering, This means buying tokens for products or services that haven’t yet been finalized.
Are ICOs Legitimate?
If you happen to be living in South Korea or China, then you’re out of luck since using or trading in cryptocurrencies is banned in those countries. In the UK and US however, the regulators are treating them as they would stocks and bonds.
The range of activities that ICOs can be used to support are quite a number, and this makes it slightly more challenging for an investor to figure out what to invest in to turn a significant profit. Nonetheless, the US Securities and Exchange Commission might help make things a bit easier by sniffing out any suspicious activity.
Should You Invest In Them?
A lot of the investors that buy in to these new coins do so having anticipated a rise in demand for the service/good that’s being promoted. If after launch the demand rises, then the tokens they had purchased enjoy an increase in value, meaning they can sell them for a higher amount than they had bought them for.
Whether or not you should invest in them depends on how well you think the startup promoting them might do.
What Financial Firms Have To Say
Digital currencies have had their fair share of bashing from a growing list of financial advisory institutions and banks, who view this sudden wave of cryptocurrency madness as a bubble that’s set to burst really soon. Despite their harsh opinions, some of them have been seen taking measures that’ll ensure they also get to benefit in their own ways. There has also been a lot of pressure from their clients side to devise ways that they can use to monitor the digital currencies they decide to invest in, within the banking platform.
Tiffany Galvin, a representative from Goldman Sachs has been quoted saying that the investment banking firm is indeed looking for ways that they can best serve clients who happen to have interests in the same. On the other hand, JPMorgan Chase CEO Jamie Dimon is on record for stating that the whole Bitcoin regime is just one big fraud. He claimed that its not viable to “invent a currency out of thin air and think that those who are buying it are smart”. He went on to add that if he got to know of any of their employees trading through the digital currency, they would immediately be out of a job.
It seems as though we’ll continue seeing a lot of back and forth regarding comments about digital currencies and whether or not they’re worth buying into, but at the end of the day, only you can decide what you want to do with your money.
What is required, however, is a lot of forethought before you buy into any cryptocurrency you think might turn a profit in the near future. There have been many investors whose choices proved to be the right ones, and whose banking statements reflect the wisdom in their choices, but experts still argue that this market is still very volatile to depend on as a permanent vehicle of investment.
The biggest risk here lies in predicting how well a product or service will perform once launched. Being able to make a correct prediction should help see things through. All in all, the rule of thumb that applies here has already been used many times before in countless other situations, and it still remains a principle rule in any form of investment. Avoid placing all your eggs in one basket, lest they all get smashed with one blow.