All about ICO and how they work

ICO has taken off as a new addition to the domain of Cryptocurrency and Blockchain. In this article, we’ll get to know everything about ICOs and how they work and how to profit from them.

What is ICO?

The term ICO stands for Initial Coin Offering. An IPO or Initial Public Offering is when a company decides to go public and trades the shares of the company publicly for the first time. ICOs are the IPOs of the Crypto World. Similar to IPOs, the launching of an ICOs is when a company is looking for funds to launch a new coin or a new service.

In the Blockchain and Crypto space, budding start-ups and new service providers use a fundraising method to generate funds. This is when the startups take the help of Initial Coin offerings (ICOs). These tokens, remarkably similar to Shares can be bought by an individual who wants a stake in the product/company. They might also have some utility in that project.

How does an ICO works?

With the help of ICOs, Cryptocurrency start-ups frequently raise funds and then distribute tokens(coins) in return for the Investment. An individual can be transfer or trade these tokens across the network like normal Cryptocurrency coins. Some ICOs entitle the investor to company dividends making them more desirable.

Initial Coin offering (ICO) vs Initial Public offering (IPO)

The main difference between ICO and IPO is the status of the provider of the offering. On the one hand, Well established companies take the help of IPOs to raise funds. And on the other hand, budding Crypto start-ups use ICOs to raise funds. Also, the risk factors are far greater in the case of an ICO. Because a well-established company offering an IPO is generally more secure than a new crypto start-up.

Rules and regulation

Rules and regulations regarding these offerings are also different a lot. While government agencies monitor IPOs strictly, ICOs have no such regulatory body to govern them. When government bodies intervene, a lot of documentation and paperwork is necessary (for IPO) which is not in the case of ICO as the whole process requires just the user, programmers and the internet.

Ownership and share

The ownership of an IPO implies that the share of future earnings will be given to the shareholder. This however doesn’t necessarily happen in the case of an ICO. With the ownership of the coin, an investor can’t claim a part in the ownership of the company.

Returns

Shareholders investing in an IPO are offered dividends based on the performance of the company in that year. Whereas with ICOs the white paper describes the benefits of the project to the investors. There are numerous ways one can get value out of an ICO. These are described in the coin structure, which talks about the benefits that the investor will get from the company.

Investment size

IPOs are notoriously known for being expensive. Individual shares are quite expensive and one needs to put a considerable amount of money into a sizable IPO Investment. On the other hand, ICOs are fairly smaller Investments and offered the tokens are at a low price.

Accessibility

Government bodies regulate IPOs, meaning that investing in an IPO of one’s own company is somewhat simple when the company is in the jurisdiction of the government. However, when a person wants to Invest Money in a foreign company, they need to contact a broker. On the contrary, an individual can purchase ICOs from any location in the world with anybody who has access to the internet.

Concerns

As we’ve talked about earlier ICOs lack regulatory protection. Scams are rampant with ICOs. Additionally, as with Cryptocurrencies, their values are prone to fluctuations and can change rapidly. Usually, start-ups offer ICO, which implies that the business might be unstable and be at risk of collapse.

Recently, a lot of pump and dump scams have given ICOs a bad name. Furthermore, it’s challenging to fully understand an ICO. Too much popularity and hype can inflate the price of an ICO far over its actual cost which raises concerns over the monetary security of the investment.

How to wisely invest in an ICO

Before thinking about buying a particular ICO, one must look at some important things with utmost care. Anonymous creators or creators using fake accounts are enough to raise red flags. Additionally, one must ensure that the company should have a legal entity and have a well structured and detailed white paper. Being open-source and using Blockchain technology, the project code should ideally be on the Company’s GitHub page.

If these issues are visible, it’s unwise to invest in that ICO.

Conclusion

ICOs have proven their worth giving returns in millions, however, some of the issues raises a few concerns which we covered in the article above. Hopefully, this will give you a good idea about Initial Coin Offerings and how to get the most out of them without getting into scams.

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