Initial Coin Offering (ICO) – What you need to know
Are you wondering what an initial coin offering (ICO) is? As commerce evolves with advancing technology, new forms of capital are being developed for use in the online environment. Some of the most innovative and popular ideas regarding the future of money and wealth transfer are known as cryptocurrencies.
A cryptocurrency is an exclusively digital form of money that employs a process called cryptography to convert pieces of tangible information into lines of elaborate computer code.
What is an Initial Coin Offering
An initial coin offering (ICO) for cryptocurrency is like an Initial Price Offering (IPO) on the stock market, but instead of buying shares in a company, you buy digital coins. In both cases, you can think of these as public crowdfunding efforts where investments in a new company is rewarded with shares of the company.
The main difference is that with an IPO you own part of the company as stock, and with an initial coin offering (ICO), you own digital coins issues by the company, but don’t have things like equity or voting rights, you just get the new token/cryptocurrency/coin.
In both cases the idea is similar to crowdfunding, to raise money for a new idea or product, to help give value to a capital asset, and to ideally have a capital asset held by investors that appreciates in value if the business is successful thereby rewarding early adopters.
What is a token?
ICO’s generally offer tokens, therefore it is helpful to understand the terminology. A “token” is short for a “cryptocurrency token”. In other words, token=cryptocurrency (meaning all cryptocurrencies are tokens). For example, Bitcoin tokens are the cryptocurrency built on the Bitcoin blockchain, and Ether tokens are the cryptocurrency built on the Ethereum blockchain.
Interestingly, unique coins can use the Ethereum blockchain and build their own token network off it. This is what about 1/2 of the ICO’s in 2017 have done. When you enter an initial coin offering that uses the Ethereum blockchain, you are generally going to be trading “ether tokens” (the popular cryptocurrency that trades under the symbol ETH) for an ICO’s specific branded tokens. It is a bit like trading Bitcoin for Bitcoin Cash (a unique token built on the Bitcoin blockchain), or Ethereum for Ethereum classic. The new tokens are built off of the existing blockchain, but they are otherwise a unique cryptocurrency with a unique market value.
It’s also important you know that an initial coin offering (ICO) is an unregulated means of crowdfunding that offers a new cryptocurrency at an initial cost. This is an alternative to other more traditional ways of raising capital.
There have been many new ICO’s launched in 2017, and new ones are being offered every day, but not all of them are reputable. Even out of the reputable ones, only some of them will fund success. If investing in the coins with the highest market caps is risky and investing in the altcoins with low market caps is even riskier, than ICO’s are even riskier than that. This isn’t to say you shouldn’t invest in an ICO, but you should do your due diligence and research as with any investment, and be prepared for some initial coin offerings to not pan out.
The author is currently invested in the cryptocurrencies located on the ICO Portfolio page, which will be updated as additional positions are added or removed.