Cryptocurrencies and initial coin offerings (ICOs) are hot topics right now. There are concerns about the legality of these distributed ledger platforms and the potential for their use in illegal activity. But what exactly are they, how do they work, and can you invest in them? Let’s take a quick look at these digital currencies. And, more importantly, their associated ICOs.So you know what they are, how they benefit you, and whether or not you should get on board with them.
What is an Initial Coin Offering?
An initial coin offering (ICO) is a means by which a startup raises funds in exchange for offering a new cryptocurrency or blockchain-based product. An online auction often accompanies the fund-raising event. In which participants purchase a certain number of tokens with fiat currency. What you do at the auction varies depending on the terms of the ICO. But the most common scenario involves investors purchasing “tokens.” That confers some amount of investment exposure to the company’s growth. Some companies issue their digital currency as an add-on to the official coins.
How Does an ICO Work?
An ICO is similar to a Kickstarter or Indiegogo campaign in which the startup seeking funds issues “tokens” that confer some investment exposure to the company’s growth. The tokens are typically based on blockchain technology and are often called “altcoins.” There are a number of different models used by startups in the crypto space. But most use a standardized model overseen by an independent non-governmental organization.
Benefits of Investing in ICOs
There are a number of different benefits associated with investing in ICOs. Some are purely financial. At the same time, others have to do with the potential for increased investment returns through increased demand for the tokens. Here are some of the main benefits of investing in ICOs: Regulation. One of the main benefits of investing in ICOs is regulatory compliance.
The token companies must be licensed and regulated according to applicable laws. Proprietary Valuation System: One aspect of regulation that makes investing in ICOs attractive is the proprietary valuation system used by the startups issuing digital assets.
According to this system, the market capitalization of all cryptocurrencies equals $4 billion, with $3 billion reserved for the developers and marketing people responsible for building the brand. Secure and Stable Tokens: Digital assets are just codes that can transfer between computers. But they can also be authenticated as having been issued by the right party and transferred with certainty.
Drawbacks of Investing in ICOs
Like most investments, investing in ICOs comes with some risks. One of the biggest challenges in investing in ICOs is understanding whether the potential rewards are worth the potential risks. Here are some of the main challenges associating with investing in ICOs: Limited Financial Information: While there are a lot of benefits to investing in ICOs, the flip side is that you are limited in what you know about them.
There needs to be more financial information about these companies, and you can’t get a feel for their viability or whether they will be successful. No Regulatory Help: The best you can do is read many press releases. And try to piece together what is happening with the companies without help. No Investment Returns: There needs to be more information about the companies themselves. It’s hard to tell what kind of investment returns are possible.
Initial Coin Offering (ICO) vs. Initial Public Offering (IPO)
IPOs raise funds for companies seeking capital from investors and result in the distribution of company shares to investors. For ICOs, crypto companies raise funds by selling coins or tokens. In either case, investors are optimistic about the company or cryptocurrency. And invest in the belief that the asset’s value will increase over time.
Of course, the main difference between an ICO and an IPO is that investing in an ICO does not guarantee a stake in a crypto project or business. ICO participants bet that a currently worthless currency will later increase in value from its original purchase price.
Bottom line
There are a lot of risks associated with investing in initial coin offerings. However, you don’t know what kind of returns you will get and whether the companies are legitimate. You also need to find out what financial information is accurate and what is not.
There are also risks associated with investing in cryptocurrencies, so make sure you understand the risks and rewards before investing. In the end, if you are looking for a quick and easy way to make money, an initial coin offering could be the right thing for you. But make sure you research and understand the risks before investing.
