When businesses are looking to take the next step in their growth, they have a few traditional options through which they can secure the funding that they need. These options, include, among others, securing a loan, seeking out a professional investor or going public. However, there is now a new option that is really making waves — The Initial Coin Offer (ICO). Below is a detailed look at ICOs, including the things to consider before investing in an ICO.
What is an ICO?
An ICO is a new way that start-ups or projects use to raise capital.This method of fundraising rides on the success of the blockchain technology and the new emerging digital currencies. Companies create a digital token known as a coin and sell it to people who want to invest in exchange for cash or digital currencies like Ether or Bitcoin. The tokens issued can be used by the investors to purchase goods or services.
Digital crowdfunding is now a big part of the everyday business lexicon, with ICOs having proven just how effective they can be on several occasions. There is also a general consensus that most Initial Coin Offerings come with similar levels of risk for investors as venture capital. Still, ICOs have their skeptics, with many investors still wary to wade into the ICO waters, regardless of the many benefits they offer.
ICO vs. IPO
The ICO provides a way for a start-up to bypass the traditional venture capital process when they opt to use something that is more akin to a Kickstarter campaign. The IPO is predicated on the value of the digital tokens issued rising once the project or company has been launched.
In essence, an ICO works in a similar way to an IPO (Initial Public Offering) where a company allows members to the public to own a piece of the company by purchasing the company’s shares. However, the major difference between ICOs and IPOs is that investors in an IPO own part of the company, while token holders who participate in an ICO, do not own any equity, which means that the company has no actual obligation to them.
What Are The Benefits Of ICO Investing?
Ethereal started the first ever ICO in 2014, managing to amass 14 million supporters by launch. This success became the inspiration for many other projects to launch their own ICOs, and made them a highly attractive investment. Below are some of the advantages of this form of digital fundraising:
- No Boundaries:They are generally available to international investors, giving them larger scope than is possible with equities.
- A Decentralised System: Because of a decentralized blockchain system that does not involve any governments or central banks, tokens are more flexible and can be introduced to investors in any country.
- The ICO Mechanism: The ICO mechanism offers advantages that cannot be found with traditional venture capital investment. For instance, investors can subdivide or consolidate coins, and even trade them on online exchanges.
- Early Coin Purchase Advantages: Not only are funds raised in an ICO transparent, companies also explain what the money will be used for. Early supporters enjoy high liquidity and significant capital growth in the starting phase of the company or project.
- High ROI: For investors looking to invest in a new ICO, it is a great choice for them to not only receive quick and early profits, but it also offers a good medium to long-term investment. As the number of supporters increases, the funds increase along with the overall value of the investment.
Are ICOs Regulated?
Since the first ICO was mooted, there have been a lot of concerns over its safety as an investment, and legality. As a result, many regulators from around the world are starting to pay attention to Initial Coin Offerings, developing new rules aimed at making them taxable and more secure. For instance, in the summer of 2018, the U.S. Securities and Exchange Commission (SEC) moved to strengthen its rules regarding ICOs. Other countries including Russia, Singapore and Hong Kong have issued advisories on ICOs and the associated digital currencies, warning that they are not safe investments as they work on new regulations for the sector. While many countries try to find some kind of compromise, some like China have decided to ban them outright, arguing that they threaten the country’s economy and financial stability.
How to Invest in an ICO Safely
The first step to ICO safety for an investor is reading the project’s whitepaper and carrying out an evaluation of the use case’s feasibility. The best way to do this is to ask as many questions as you possibly can on various social media channels such as Telegram and Reddit. This will give a clearer picture of whether it is a company or project that you should look into or if it is a simply a money making scheme by the project team.
Also look for the project website to find out more about the members of the project team as well as to get the ICO’s participate information. This is important so as to establish if the company’s founders or team have a questionable history. Particularly on Telegram, there are many scams where impostors pretend to be the founders of an ICO and demand fiat currency for contribution in an ICO, which is highly irregular.
What Are The Top ICO Platforms?
Today, there are numerous ICO platforms competing in this space. However, not all platforms are created equal. Currently, the top ICO platforms now include:
• Ethereum (ETH): It is widely viewed as the leading ICO platform, as it pioneered smart contract functionality that is integral to the success of ICOs.
• Neo (NEO): Since its debut as AntShares, Neo has come a long way, and is commonly seen as China’s answer to Ethereum. Incorporating smart contract functionality, it has hosted several large ICOs.
• Icon (ICX): The Icon team has been hard at work on this project, launching several new features over the last few months that have made it an attractive option for ICOs. Among the most notable are the ability to swap ERC20 for ICON Mainnet for ICX tokens and a new wallet.
The ICO phenomenon is quickly changing the world of crypto as well as revolutionizing global finance by effectively generating seed funding to get startups from around the world off the ground. By keeping the above tips as the things to consider before investing in an ICO, you can benefit safely from this emerging investment vehicle.