By now, the crypto-currency frenzy has caught the attention of almost everyone. These days, even the non-tech-savvy masses have a rough understanding of what bitcoin is and what it might be worth to investors. While crypto-currencies have a lot in common with traditional, regulated stock markets, they also have some crucial differences. For those with a more advanced knowledge of crypto-currencies, there are multiple speculative opportunities for investors. One such investment opportunity in Blockchain technology is the ICO, which is the cryptographic equivalent of an initial public offering (IPO).
What is an ICO?
Most of us are familiar with the term IPO, but let's refresh things for those who aren't. An IPO (Initial Public Offering) is the first time a private company goes public, in exchange for a security issued by the company (for example, bonds or stocks). Similarly, in the field of cryptocurrencies, we have the ICO (Initial Coin Offering), which serves exactly the same function. Startups looking for funds to finance their project can go directly to the public, without the interference of banks or venture capitalists, via an ICO. However, unlike the regulated stock market world, investors in an ICO do not own a piece of the underlying company (defined by the number of their shares) and have no voting rights in the company. Instead, since they are investing in a currency, what they get in return for their investment are the coins (tokens) themselves, which can be used for online transactions or future investments.
What are the types of ICOs?
There are two instances when an ICO is likely to be executed: Right at the launch of a new cryptocurrency, or when a startup is gearing up for big growth and needs to raise money quickly. The main advantage of an ICO over seeking venture capital is that there is no limit to the eligible investors in an ICO, as anyone can participate.
How big is the ICO market?
Since there are no financial institutions involved or regulations enforced, an ICO can raise funds in minutes from anyone in the world. For this reason, speculators see ICOs as an excellent opportunity to make large profits in a short period of time. Funds raised by ICOs have so far exceeded $2.3 billion, including $462 million in the first half of 2017 alone. In the same period, funds from venture capitalists reached $295 million. An indicative figure of how quickly an ICO can raise funds is that of startup Brave, which managed to raise $35 million in 30 seconds.
Is it safe to invest in ICOs?
Although legitimate projects widely use ICOs to raise funds, the lack of regulation on cryptocurrencies involves unique risks. Research is needed to ensure that the startup is legitimate and serious. The "wild" nature of crypto-currencies can be both good and bad for investments. Potential investors see ICOs as an incredible speculative opportunity, but it can be difficult to identify scams. There are no basic guidelines for identifying the legitimacy of an ICO. You can, however, assess the merit of a startup based on legitimate third-party attention, whether positive or negative. In cases where there is not adequate information about the new company's structure, management, or mission, you should be more cautious. For example, if chat rooms and forums are the only available source of information about the company and the investment opportunity, you should be aware that opinions and reviews on these forums may be paid for by the company itself. In addition, the scale of success of a new project can be inflated by a successful online marketing and SEO campaign. Contact the company itself. Find third-party sources of information that you trust. It's not wise to judge the merits of a startup based on how it appears in a forum or in the company's own advertising copy.
With the current state of flux that characterizes crypto-currencies, fortunes can be made in a matter of days. These quick gains will continue to attract more and more people to ICOs. While no one knows which crypto-currencies will survive, the revolutionary Blockchain technology is certainly here to stay, meaning that ICOs are going to be important to the future of fundraising. In the absence of regulation around ICOs, the opportunities are great, but investors should be very cautious in their decisions for now. The lack of regulation is surely temporary, as governments around the world are working to put in place legal structures that will undoubtedly lead to transparency for potential ICO investors similar to what is currently available for IPOs.
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