ICO – What are They?
ICO stands for Initial Coin Offering. An ICO can be loosely compared to an Initial Public Offering or an IPO and is also a means of raising funds for a new business to take off. The main difference between an ICO and an IPO is that ICOs are strictly for businesses that are launching a new cryptocurrency coin, or something related to the crypto field.
How does an ICO work?
Any company that wants to launch a new coin in the cryptocurrency space needs to be able to fund the new venture. To attract funds these companies will approach potential investors and offer them the new coin at a low cost. The low cost is the Initial Coin Offering. In exchange for tokens of the new cryptocurrency, investors pay fiat currency or another form of crypto like bitcoin.
ICOs can also be used to launch DApps or decentralized app that can exist on the blockchain. ICOs are also used for launching other types of services offered on the blockchain like peer to peer content sharing and so on.
What is in it for the investor?
Investors who buy the tokens are hoping to get a good return on their investment. Using bitcoin as an example, back in 2010 when it was still early days for the coin the value was as low as $0.008. By December 2017 the value of bitcoin had reached $19,000. As you can well imagine, those who bought the coin back in the early days made a whopping profit.
It is the same with every ICO, those who invest and by the tokens early on hope that the coin or service will do very well and that the value will go up a good deal. Similar to buying shares in the stock market, investors in ICOs hope that when the value has gone up they can sell their tokens and make a profit. Alternatively, as the cryptocurrency gets more recognition it can be used to buy other products or services over the blockchain network.
The advantages of ICOs
ICOs have provided a large talent pool of developers a means to fund projects that would otherwise have not seen the light of day. The blockchain equivalent of crowdfunding, lets developers showcase what they have to offer and allow people who believe in their projects to invest in them. In a peer to peer environment, ICOs remove the need for involving banks or other lending agencies in obtaining loans to fund new projects. Also, people can see and choose first-hand what they want to invest in and assess the risks for themselves.
The disadvantages of ICOs
ICOs are not without their share of challenges. There is still a lack of basic regulation when it comes to ICOs so the risk to investors can be high. While the investors can enter into a smart contract with the developer or new business, and the investment might be a small amount, a lot depends on how well the coin or service will perform. There is always the chance of investors having to cut their losses and moving on.
ICOs have provided an even playing field for new developers and businesses to get a foothold in the cryptocurrency and blockchain environment.