(Glossary for technical terms listed below)
Not only is technology getting far more advanced every day, businesses are coming up with brand new ideas for a variety of areas – such as raising funds for their newest business venture.
One of such ideas is the Initial Coin Offering (ICO). For the more updated readers, this may not come as a new term to you. However, to keep the rest on trend with the current happening, here is ICO in a nutshell.
An ICO is usually initiated by a cryptocurrency start-up firm – who would use blockchain to keep track of the transactions, and create a plan and include the information needed on a “whitepaper”.
ICO is somewhat like an Initial Public Offering (IPO) as both are done to raise funds for the company. However, IPO involves the trading of stocks while ICO involves the trading of a “coin” which is an asset. This coin is treated as a certificate to confirm the ownership rights to the company’s asset. The coin or token in question is not of the physical realm, rather it is in the digital realm. It can represent a sort of value, or be of value itself. An example would be that it may allow the investor to use the company’s new application.
A downside would be that the “coin” would decrease in its value when the company decides to increase the number of coins circulating in the market. Even so, it may increase when the demand is higher than the supply – which may be due to the increasing popularity of the product.
Another stark difference is that ICO does not involve a third party (i.e. a bank) due to the use of a blockchain. It is a continuous list of growing records that is linked using cryptography – a technique used to protect private and crucial information from any prying eyes. It may sound quite unorthodox as compared to the traditional IPO but it has a growing potential as evidenced by the $380m invested by May 2017.
There will be some risks involved when investing in an ICO – as with investing in general – but here are some areas to look out for before investing that will hopefully prevent any disappointments:
Ensure that you understand the product being offered by the company. It is always better to do your research and understand it completely before taking the leap to invest. This way, you will know for certain the ownership rights you are entitled to by purchasing the “coins”.
Due to ICO being largely unregulated due to the absence of a third party, ensure to do a check on the company’s credibility. Look at any existing information of the company – be it through newsletters, information on its website, any articles about the company. Adding on, do a check on its partners as well. If the partners are credible and trustworthy, most likely the company in question would be the same as well (by extension).
Do some research on the company’s team to see if they have any relevant experience in the field and if they were previously involved in any other projects.
Do not dive headfirst into this investment. Remember to always test the waters first. Treat this as you would an expensive and luxurious product: you would always try a sample before fully purchasing something that has a hefty price tag. Likewise, buy a few of tokens, inspect them, and check if they work and are legitimate before diving right in.
Always read the whitepaper as most of the needed information of the ICO is found on there. Do some research together with it as you would have to take it with a grain of salt. At the end of the day, the whitepaper may include information that is also used to entice potential investors.
Just like investing, ICO presents some risk too. Research should be done properly prior to participating in an ICO and purchasing any “coins”. Hopefully, this ICO, in a nutshell, was helpful in providing you a brief outline and tips that may hopefully be beneficial to you if you are looking to take part in an ICO.
Cryptocurrency – an online medium of exchange (much like a normal currency) for digital information through the process of cryptography
Blockchain – A continuous list of growing records, allowing companies to keep track of the digital transactions of cryptocurrency (without the need for a third party to help keep track of it).
Whitepaper – Includes information regarding the ICO such as the description of the project, the needs it will fulfil, amount of money needed to start the project, duration of the ICO, types of money accepted, and percentage of the “coins” the company will keep.
Cryptography – A technique that protects the privacy and integrity of confidential digital information by converting it into an indecipherable text.