As cryptocurrencies continue to grow in popularity, you may have seen the term “ICO” floating around. If this leaves you wondering, “What is an ICO?,” rest assured that you’re not alone.
Below you’ll find a crash course on ICO meaning as well as terms to know and how to add them to your portfolio.
What is an ICO?
An initial coin offering, sometimes referred to as an initial currency offering, is essentially a crowdfunding venture for the creation and sale of digital tokens. A company does this by creating its own digital currency and then offering it to investors in exchange for an established currency, such as bitcoin, ether or fiat.
Typically, the public will invest in these startup projects for a couple of different reasons. The first is the belief that the tokens they’re currently buying will increase in value over time, usually via an increased market demand. The second reason is that purchasing these digital tokens allows the investor to have access to a tangible reward such as access to a service or a share of the startup’s overall earnings.
History of ICOs
The first initial coin offering was made in 2013 by the Mastercoin project, and several other companies immediately followed suit in that same year. By 2014, Ethereum was able to raise over $18 million with its ICO, and $2.3 million of that was received in under 12 hours.
The hype over ICOs died down a bit after that, and the DAO scandal in 2016 left many people hesitant to invest in these projects. DAO was a project that was able to raise over $150 million on the Ethereum platform, but someone was able to hack into the system and drained roughly $60 million of those funds from the project, which affected thousands of people. After this, both the Ethereum Foundation and the U.S. Securities and Exchange Commission determined that more caution was warranted for future ICOs.
Once the SEC handed down the ruling that sales of digital assets, such as the tokens offered by ICOs, are subject to federal regulations for securities, interest in the practice picked back up. By the end of 2017, there were almost 50 ICO offerings taking place each month.
Are ICOs Legal?
The short answer to this question is: Yes, they’re more or less legal. Despite the fact that they’re now subject to certain SEC laws regarding securities, they still exist in an odd gray area of legality.
Basically, because of their newness, there’s still a lot of wiggle room for companies regarding ICO meaning and the boundaries of what can and cannot be done.
High Risk and High Reward
It’s important for investors to understand that adding ICOs to their portfolios is very high risk even in a best-case scenario. However, the flip side to this is the potential for serious rewards. It’s a gamble, but if it pays off, it’s often well worth the risk.
The best thing to do before investing in an ICO is research thoroughly. Read the white paper, check trusted review sites and don’t make any impulse decisions. Because this is still a relatively new investment option, it’s important to do your due diligence before deciding which projects to take part in. Be sure to check with your financial advisor before investing.
How an ICO Works
The process was briefly mentioned above, but it bears repeating in a bit more detail.
An ICO begins with a startup company that has an idea for an innovative form of cryptocurrency. Instead of jumping through the hoops of trying to get funding through banks or traditional venture capital methods, the project turns to the global investment community.
First, the company creates a detailed plan including a white paper, website and sometimes even a working prototype. It then offers digital tokens for the new currency in exchange for an established currency, which is typically bitcoin, ether or fiat.
Tokens can mean different things for different ICOs. Some companies’ tokens are given with the future expectation of a share of the profits, but others may be given as a stake in the company’s future or for access to a particular service being offered.
How to Participate in an ICO
The great thing about these projects is that virtually anyone can become a ground-floor investor. The best way to do this is to research as much as possible about how initial coin offerings work and then be sure you have a good understanding of what a successful ICO typically looks like.
The more you understand about cryptocurrency, ICOs and general investment principles, the better your chances are for making investments that pay off in the future.
Terms You Need to Know
Before you get started researching ICO opportunities, be sure to familiarize yourself with the following list of common terms:
Cryptocurrency is a digital form of currency that utilizes encryption techniques to prevent counterfeiting and fraud. The major allure of this type of asset is that it has no centralized regulating body like traditional banking institutions.
This is essentially a publicly accessible, virtually incorruptible ledger that records the details of digital transactions between two parties in chunks called blocks. Generally, a blockchain is managed by a peer-to-peer network system that does not allow retroactive modification of any single block without altering the entirety of the existing blockchain. Due to its structure, it provides secure, decentralized records.
Bitcoin is the first and most well-known cryptocurrency available. It was created in 2009 by an anonymous persona called Satoshi Nakamoto and continues to be a key player in the online marketplace.
The Ethereum platform not only has its own digital currency called ether, but it also utilizes the same decentralized software and blockchain concept to allow programmers and developers to create work contracts and publish software applications.
ICO Token vs. Coin
In essence, a token is intended to be a placeholder for a tradeable asset such as a service, commodity or a certain value of a specific cryptocurrency. This gives tokens a broader functionality than coins. Coins or “altcoins” function on their own independent blockchain and are alternatives to Bitcoin. They may be used as payments or have additional features such as smart contracts.
Security tokens are directly tied to a tangible, tradeable asset, which means they are subject to SEC securities laws.
These act as a sort of “digital coupon” for a developing company’s future product, similar to pre-ordering a book or game. They’re exempt from the SEC laws governing securities.
Cryptocurrencies typically have a finite number of tokens that can be distributed. This structure gives tokens a definite value. How this value is determined varies from one currency to another.
Market Cap and Price
Market cap refers to the amount of fiat currency, such as USD, that has been invested in a particular cryptocurrency. Price refers to how much it costs to buy one unit of the cryptocurrency.
It’s important to understand that the two cannot be conflated.
Where to Find Upcoming ICOs
If you’re interested in jumping into the world of ICO investment, it helps to know where to look. Check out ICOSpotter.com for a constantly updating list of all of the most promising new ICOs plus the latest news and developments with popular ICO projects.