Initial Coin Offering: ICO, what is it? Good and Bad

BREAKING DOWN 'Initial Coin Offering (ICO)'

When a cryptocurrency startup firm wants to raise money through an Initial Coin Offering (ICO), it usually creates a plan on a whitepaper which states what the project is about, what need(s) the project will fulfill upon completion, how much money is needed to undertake the venture, how much of the virtual tokens the pioneers of the project will keep for themselves, what type of money is accepted, and how long the ICO campaign will run for. During the ICO campaign, enthusiasts and supporters of the firm’s initiative buy some of the distributed cryptocoins with fiat or virtual currency. These coins are referred to as tokens and are similar to shares of a company sold to investors in an Initial Public Offering (IPO) transaction. If the money raised does not meet the minimum funds required by the firm, the money is returned to the backers and the ICO is deemed to be unsuccessful. If the funds requirements are met within the specified timeframe, the money raised is used to either initiate the new scheme or to complete it.

DISADVANTAGES

As the name somewhat suggests, an ICO is an initial coin offering. This means investors are often buying coins or tokens for a project that does not even fully exist yet. In most cases, the team will have some degree of code to show what the project will look like. However, there is no guarantee of projects ever being completed or even being embraced by mainstream users. This is a risk people need to be willing to take, as it may take years until there is an actual market for the project in question.

Speaking of investors, the majority of ICO investors are enthusiasts, rather than people with expertise. Backers have a financial stake in the process, but an ICO is not regulated or registered. This means users will not be reimbursed if something were to go wrong. This is something a lot of people tend to overlook these days, even though it has become less of an issue ever since smart contracts were used to lock up ICO funds.

Additionally, not everyone will be able to partake in every ICO these days. This is especially true on the Ethereum network, as a lot of ICOs sell out in less than 30 minutes. Partaking in such an event means users need to send a transaction at a much higher fee to ensure their transfer is picked up in a network block. This higher cost just to participate in an ICO is not a positive development by any means. Then again, it is only a minor drawback to most people, albeit still important to keep in mind.

ADVANTAGES

The fact that ICOs are open to the general public means anyone in the cryptocurrency industry can partake if they can get funds transferred on time. This means the projects can raise funds in a completely decentralized manner, which is quite important. More investors from all over the world means there is less centralization, which is what cryptocurrency is all about.

Moreover, the concept of cryptocurrency ICO means people can help shape the future of this entire ecosystem. There is a wide range of different projects raising funds through an ICO, and every single project aims to bring something new to the table. Moreover, virtually all of these projects raise a lot of money in the process of their ICO taking place. Multi-million dollar projects are very common in the world of cryptocurrency ICOs.

Perhaps the biggest advantage – to speculators, that is – is how the tokens can be bought at a low price. Most exchanges will eventually enable trading of these tokens, where they can be sold for a profit if the project is successful. Ethereum-based tokens have a habit of appreciating in value by quite a magnitude. Value gains of over 1,000% over the course of a year or less are quite common, regardless of the projects being finished by that time. From a speculative point of view, cryptocurrency ICOs are more than worth getting involved in. This could ultimately become the downfall of these projects as well, though, but only time will tell if that is the case.

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