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What is an ICO? Everything you need to know about Initial Coin Offering

An ICO (Initial Coin Offering) for a cryptocurrency is about the same as what an IPO is for a stock. To raise money for the first time, the cryptocurrency developers are offering a certain portion of their new tokens to the masses and corporate customers. In this way, they hope to raise enough money, with which they can eventually get their project off the ground.

 

What is an ICO?

The Initial Coin Offering (ICO) takes place very early in the process of a new cryptocurrency. It’s similar to how a company makes an initial public offering when it goes public. Here, publishers of the new cryptocurrency are giving investors the chance to be among the first participants to buy the tokens. This whole concept of an ICO is not new. The first cryptocurrencies to raise money through an ICO in order to raise more money include Mastercoin and Ethereum.

New currency in exchange for fiat money

With the Initial Coin Offering, interested parties get the opportunity to invest in the new cryptocurrency relatively early. Usually, the issuers offer a small percentage of the new cryptocurrency in exchange for other fiat money. In this way, the publisher has the opportunity to find investors and thus capital at an early stage.

Traditional fiat money such as international currencies (euros, dollars) is generally always accepted. In addition, those offering an ICO also accept the money in Ethereum or Bitcoin. These are the most popular cryptocurrencies at the moment. In most cases, Ethereum is used. The price of Ethereum is generally a lot more stable than the price of Bitcoin.

ICO as crowdfunding for crypto start-ups

Startups always need one thing. Whether they are active in the crypto market or the traditional market. And that one thing is capital to successfully launch and scale their planned business. The providers of cryptocurrencies and services related to different blockchains also need a certain amount of seed capital to make their new currency or product work faster.

An initial coin offering is a relatively simple and direct way to get in touch with potential investors. And for investors, a serious initial coin offering can be a promising investment – ​​provided the project actually starts successfully and can continue. In this case, early investors have a chance to get coins from the new currency very cheaply.

Time limit

An ICO always has a time limit. New investors can buy the coins within a certain time frame. The provider of the ICO determines how long this period will run. It is therefore important that new investors are on time. Are they not? Then they run the risk that they will not be able to purchase the tokens or crypto coins for a favorable price. The providers of the ICO hope to be able to build FOMO with this so that as many coins as possible are sold in a short time.

What are the benefits of an ICO?

ICOs bring many benefits. These benefits apply to both the providers of the ICO and the buyers. Setting up a cryptocurrency costs a lot of money and time. The money has to come from somewhere. Through an ICO, project developers can collect money, with which they can pay for the project. In addition, they do not pay any tax on this, because there are no regulations in the Netherlands regarding ICOs for cryptocurrencies.

Without the ICO, many projects would not be able to develop themselves. For example, Ethereum would never have existed if there was no ICO. So there are many projects that would be lost if there is not enough money to pay for these projects. And that while the idea for these projects has been there all along. So very sinful.

But an ICO also has advantages for you. If you have a lot of confidence in a project, there is a good chance that the value of the cryptocurrency will be very high when the project is completely completed. You could buy this cryptocurrency for a much lower price during the ICO. That also means that you can later sell the crypto coins with much more profit. So it is in fact an opportunity that you cannot pass up. Of course, you have to do good research about the ICO first. There are also unpleasant risks associated with the ICO.

Risks of an ICO

On the other hand, there are also significant drawbacks and risks, especially for consumers. First of all, it should be noted the extremely high risk of loss. On the one hand, this stems from the fact that many inexperienced investors are attracted by the ease of access via the Internet and the promise of quick money. It is very easy to invest in an ICO.

Most projects consist of complex technical topics, the assessment of which requires an in-depth technical understanding and extensive research. Providers of the ICO know that too. That is why they will tell the technical story as easily as possible. This makes investors think that they understand the ICO and know how the technology behind it works. This attracts more and more unprofessional investors.

Due to the early financial entry into the project, it is difficult to predict whether it will ever actually launch, develop favorably or fail. In addition, the lack of regulation surrounding ICOs is also extremely problematic. The information that the provider of the ICO mentions in the whitepaper is not under the supervision of an organization. The provider can therefore state everything in the whitepaper, without it having to be true. As an investor, you therefore do not know whether the substantive information is credible.

Unfortunately, it also happens often enough that ICOs are used for scams. Because the money is received in cryptocurrency, it is difficult to track down perpetrators of a scam. A lot of people know that, which is why criminals find it attractive to use an ICO to scam people. So always find out who is on the team of the ICO before you decide to invest.

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