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Understanding Initial Coin Offerings (ICOs)

From BitCoin to Civic and GiftCoin

With so much noise in the cryptocurrency sphere, it’s hard to turn anywhere for sound financial advice. Financial experts Jordan Belfort and Jim Cramer predict Bitcoin’s value could rise exponentially while others predict Bitcoin could fall entirely in value.

 

Are cryptocurrencies a speculative bubble or a disruptive force in our society? Are we simply applying the lessons we’ve learned from the subprime mortgage crisis or are we luddites?

I’m sure you’ve read the headlines or advertisements propagating the coin that will be bigger than Bitcoin. Will there ever be a coin bigger than Bitcoin, sure. Will it be a coin you saw in a paid advertisement, probably not.

One area where many people turn to find that next Bitcoin is newly issued tokens from ICOs. What exactly are ICOs and are they a smart investment? How are we supposed to know?

What is an ICO?

When launching a company, owners need to turn to outside funding, usually in the form of VCs or angel investors. Yet, giving up a huge stake of ownership could end up losing you control of a company. This is where initial public offerings (IPOs) came in. Anyone could buy a share and become a part owner, but the original founder got to keep his/her vision of the company in tact.

Yet, this still means that you have to answer to stakeholders and shareholders to make decisions and many CEOs have been voted out of their very own company. This is where ICOs became an attractive fundraising source. Of course, many of them are limited to blockchain based projects.

ICOs are somewhere in the middle between IPOs and crowdfunding. They’re similar to crowdfunding in that investments or donations don’t result in stock options. But investors in an ICO do receive tokens, which can be traded on an open exchange in the future or serve as vital task within the project’s protocol, giving them intrinsic value for users.

ICOs are developed based off of a proof of concept outlined in a whitepaper. Developers typically make a working product for early investors to test and then issue public tokens to help fund the rollout of that product to market.

There are many reasons people invest in an ICO:

  • Fund a project that could add good to society
  • Receive cryptocurrency at a discounted rate before it hits market
  • Generate exposure for a business you have investments in
  • Be a part of a community

ICOs are susceptible to fraud and are considered even riskier than established tokens. This begs the question of whether an ICO is a good investment or not.

To Invest or Not to Invest?

There are many considerations to take into account before investing in an ICO:

  • Proof-of-concept- what are you investing in?
  • Market capitalization of the product
  • Function of the token being issued
  • How are tokens distributed?
  • Cap of token supply
  • Long-term market cap of tokens
  • Website hosting the ICO
  • Developers, investors, and experts involved in the project

ICOs are an attractive investment option because they’re not subject to red tape and paperwork. They also have very low transaction fees. But there are also many reasons not to invest in an ICO.

  • The opportunity to buy a token on open market
  • The potential to be defrauded or scammed
  • Poor development of project prototype
  • Lack of demand for proof of concept

The decision comes down to your gut. ICOs are a great opportunity to get in on the ground floor of a potential cryptocurrency bull run. They also give you the opportunity to back a project you care profoundly for. Of course, with all investments, there is risk.

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Understanding Initial Coin Offerings (ICOs)