During the last months we have been hearing how cryptocurrencies were expanding. With this spread of information, sometimes we hear new terms that we do not really know what they are or how the apply to a certain topic. One of these terms is ‘Initial Coin Offering,’ also known as ICO.
In this article we will explain what an ICO is, how they work, who can create one, who can invest on it, and many other important things. In this way, you will not be left behind!
What is an Initial Coin Offering (ICO)?
Initial Coin Offerings are a relatively new way of fundraising. An enterprise or a group of people offer investors the possibility to acquire a new created cryptocurrency or token in exchange for Bitcoin, Ethereum, Litecoin, Euro, Dollars or other cryptocurrencies.
Let’s create an example.
Imagine that you run an enterprise and your team has an incredible project to develop. But the main problem that you face is the possibility of funding this project. As you have everything what you need, the human resources, the place, the project and the idea in an advanced stage, you only need to get the money to start working on it.
With an Initial Coin Offering, your enterprise will create a new token that will be distributed among the investors that will fund your project. If the project succeeds, then, your enterprise will be able to gather the necessary money to work in the project that you were planning.
In general, most of the ICOs are related to cryptocurrency or blockchain developments. Some of the ICOs in the market may be created by important enterprises, others may receive important support from nation-states and some of them may be just created by a group of enthusiast that are not able to receive funds for a project they have in mind.
When you invest in an ICO, you receive tokens in exchange for your contribution. Tokens are cryptocurrencies that may have different functionalities and will allow you to take profits in the future. If the ICO succeeds, then, the tokens you have purchased will be worth much more than before. If the ICO fails, then, the tokens will for sure be worth pennies.
It is important to mention that in 2017, more than $6 billion dollars were raised by more than 880 ICOs all over the world. In the first two months of 2018 (January and February), already $2.1 billion dollars were raised, compared to $32 million for the same period of 2017.
Are All ICOs The Same?
As we have mentioned before, ICOs may vary. There are Initial Coin Offerings that try to gather money to create financial products, while others to promote new governmental services and processes.
For example, at the moment of writing this explanatory article, the ICO market is very heterogeneous. Finance is the dominant industry among Initial Coin Offerings with 14.3% of the market, followed by Payments/Wallets and Commerce/Retail with 6.26% for each of them. Other categories are Asset Management, Betting and Gambling, Data Computing and Artificial Intelligence (AI), among others
Are ICOs Legal?
It depends. Yes, it depends where you live. Some countries have totally banned ICOs to operate in their countries. For example, China and South Korea have blocked Initial Coin Offerings from operating in their countries.
At the same time, other countries have decided to apply strict Know Your Customer (KYC) and Anti Money Laundering (AML) policies. The intention is to avoid scams and money laundering activities.
Before investing in an ICO is important to be informed about how your country considers ICOs and if you have to pay taxes on gains/profits.
Is it Profitable to Invest in ICOs? Are they Safe?
Some ICOs will be more profitable than others and some of them may not be able to succeed in the middle and short term. The success or not of an ICO will highly depend on different situations, like if the project is realizable or not, if the team has an important experience working in similar projects, if the business model is profitable in the short, middle and long term, among many other variables.
Of course, some ICOs may be scams. If you invest in an ICO, you need to know that in most of the countries they are unregulated, i.e. the founders may disappear with the investors’ funds and never appear again. Clearly, this is not what happens with most of the ICOs, indeed, hundreds of them have succeed during time. It is important to make a strong analysis before investing, something that takes time and most of successful investors do.
Initial Coin Offerings are a new way of fundraising that will allow several projects to be realized. ICOs may help the world by guiding it into a more inclusive and innovative one. Investors may be able to have a good ROI and projects will find people interested in investing on them.
Remember that before making any investment it is important to analyze, investigate and be informed about the project you want to place your money in.
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