What is an ICO and How Does It Work (Explained in Simple Language)
The term ICO is an abbreviation of Initial Coin Offering, and it refers to the procedure of the initial placement of coins (tokens). Unlike IPOs, ICOs do not entitle buyers of tokens to receive a stake in the company and the right to influence internal management decisions. Instead, we are talking about yet another way to implement the crowdfunding model.
You have probably already heard this abbreviation many times or stumbled upon it in various articles on the Internet. The problem is that such articles usually use insider terminology not intended for an uninitiated reader. Therefore, we have decided to write this article, in which we explain, in simple terms, the essence of ICO and what it can deliver.
Why Run an ICO?
A company running an ICO has an objective to obtain the funds needed to launch the project. Often, early-stage companies can start raising funds at initial coin placements with a minimally viable version of the product.
Investors (coin buyers), in turn, finance the development of the company at an early stage in order to get benefits from it in the future. For example, you can get a company’s cryptocurrency at the lowest price, and sell it with profit when it starts trading at higher prices.
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How It All Works
The entire process occurs in three steps:
- The investor buys a company’s future cryptocurrency, getting the guaranteed right to receive a certain amount of “virtual coins” or tokens when they are issued at ICO. For example, people who invested in ICO of Bitcoin, received 1 Bitcoin for $100. In other offerings, such investments were quoted to a certain percentage of the emission (for example, one share is equal to 1% of the crypto currency issued);
- After the issuance of the crypto currency, the investor exchanges his or her shares for virtual money at the rate that was specified in the agreement. In the case with Bitcoin, buyers received 1 Bitcoin for $100;
- When the price of the cryptocurrency start to rise, the investor is able to sell it at a very good profit. Investors who purchased Bitcoins for $100 can now sell it for several thousand dollars. Huge profitability!
At the moment, the legal status of ICOs is not defined in most countries, since the mechanisms of their taxation or operations settlement are not yet fully established. So, while raising funds through token sale is not illegal, it is also impossible to call this procedure fully legitimate.
Is It Worth It to Participate in ICOs?
The answer is – yes, it is worth it. Just make sure you do your proper research on the company you are going to support at an ICO.
According to Smith & Crown, a cryptocurrency research company, startups raised over $3 Billion through ICOs in 2017!
Regarding the types of companies that raise funds at ICOs, the statistics are as follows:
The most important thing when buying tokens during the ICO is trying to predict whether the investment can bring profit or if the risk of losing money is too large. You`d be smart to give preference to those ICOs that have working prototype behind them over those just starting an idea of a project.
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