What are ICOs? Initial Coin Offerings Explained

Ico wording with purple background and ICO factory animation

What are ICOs? Initial Coin Offerings Explained

  • An ICO (Initial Coin Offering) is the cryptocurrency equivalent of a traditional initial public offering (IPO)
  • New startups create coins which they sell as securities, to raise capital required to bring business ideas to fruition
  • When an Initial Coin Offering is successful, ICO investors are (in theory) compensated in the form of increased coin values

2017 and early 2018, witnessed a cryptocurrency gold rush driven predominantly by the ICO market. New cryptocurrencies like EOS and TRON, could be bought for mere cents on the dollar. When ICOs proved successful, coins then increased exponentially in value. (In the case of EOS, coins reached as high as $18 in value at one point.) The only question is, what is an ICO?

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What are ICOs? – A Brief ICO Wiki

In the real-word, starting a business isn’t easy. New companies need to raise capital to pay rent, wages, procurement costs, and several other expenses. Many startups, therefore, apply for business loans which (often) come with less than favorable repayment terms. Alternatively, businesses can attempt to pitch ideas to private investors who provide capital in return for a stake in ownership of a new company.

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How an Initial Coin Offering Works

Initial coin offerings disrupt traditional business financing. Specifically, by allowing startups to create and sell cryptocurrency coins as securities.

Blockchain platforms like Ethereum and Stellar, allow startups to create their own cryptocurrencies with relative ease. One New Zealand based startup which did just this in 2018, was Coingrid Ltd. They released an Ethereum based token which cryptocurrency investors can buy using Ethereum. Once Coingrid has raised enough Ethereum, they plan to use funds to build a new Christchurch-based cryptocurrency exchange. (The Coingrid ICO is ongoing.)

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Is Investing in an Initial Coin Offering Profitable?

When considering investing in initial coin offering, investors need to remember that ICO coins are not shares. Even when startups raise the capital they need, they have no obligation to compensate investors. However, ICO investing can prove lucrative when investors choose the right investment strategy.

How to Invest in an Initial Coin Offering Profitably

One of the easiest ways to profit from ICO investments is to buy coins early and sell coins as they peak in value. In the case of ICOs like Tron in 2018, early investors who bought TRX tokens at $0.002 per coin, were later able to sell coins for a substantial profit when coins reached $0.25 in value.

One problem with this kind of buy low, sell high approach to ICO investing, is that investors need to expertly time entry and exit into the market. It also needs to be remembered that not all ICOs are successful. For this reason, investors need to select projects to invest in very carefully.

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Investing in Utility ICO Coins

An alternative way to invest in ICOs (and considerably lower the level of risk involved), is to invest in ICO coins which have long-term utility value.

Most ICO coins on platforms like Ethereum and Stellar, only exist to be used as fundraising coins. Coin values can, therefore, diminish quickly once fundraising targets are met. However, utility coins are different.

At their most basic, utility coins are designed to serve an ongoing function after ICOs complete. EOS is one example of a utility token. While initially tokens were used to raise startup capital, coins are today used on the EOS blockchain to pay for network bandwidth and storage. People like decentralized app developers who use EOS, therefore, have to use EOS coins to pay to make use of the platform.

In the case of EOS, continued demand for EOS tokens has seen coins retain value after the EOS initial coin offering. EOS coins also have the potential to increase further in value, as EOS itself increases in popularity.

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How to Choose ICO Coins to Invest In

In early January 2018, Business Insider revealed that fewer than 20% of initial coin offerings in 2017 returned profits to investors. For this reason, potential ICO investors should always exercise care when planning to invest in any ICO.

At a minimum, investors should assess the viability of new startup business ideas. Background checks should then be performed on companies and individuals bringing coins to market. Lastly, whenever investing in non-utility coins, investors should always plan in advance how long to hold ICO coins for.

How to build an ICO?

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