What are ICOs and how do you choose one for investment purposes

[vc_row][vc_column][vc_column_text]The term ICO has recently become synonymous with many people, especially if you happen to use the internet frequently. Whether you bumped into this term because it was part of a controversial headline or because it was a call to invest in one, here is a detailed guide on what Initial Coin Offerings (ICOs) are all about.

What is an ICO?

An initial Coin Offering is the rough equivalent of an Initial Public Offering but now for the digital currency scene. A company will conduct an ICOs for new coins that it wants to launch on the blockchain scene. It is a call for investors to bankroll the project that the startup or company in question is looking to undertake. ICOs have an almost similar structure to crowdfunding but with stark differences that make an ICO stand out. Additionally, ICOs borrow a lot of similarity from IPOs that most people are familiar with.

What happens with an ICO is this, a startup will declare its intention to launch a cryptocurrency. In these early stages, this will be referred to as a token. The digital token offering is usually a call for support from the online community to bankroll a particular project. The startup could intend to create a system of blockchain that allows people to develop apps on it, or it may be that they are looking to develop a system to help revolutionize a particular industry. Usually, it is this project in the background that will give the digital coin its familiarity.

The startup in question will, therefore, launch a website at the least and publish its whitepaper. A whitepaper is like a blueprint or business canvas that lays bare the intention of the startup and how it aims to achieve its objectives. Interested parties will then read through the whitepaper and if convinced enough, register to be part of the ICO. In the meantime, the startup will also be looking to partner with exchange platforms to make it easier to invest in the ICO. The investors will be expected to invest in the ICO using the available payment options. This will primarily be the exchange of popular crypto such as Ether and BTC for the digital tokens that the startup is offering.

On the day that the ICO starts, the exchange will begin, and depending on the structure of the ICO that the startup has opted for, investors will receive a particular number of tokens. Investors can have different intentions with an ICO; some will invest to support the cause that the startup is undertaking and others will do it for profit. Just like the stock market, here, the investor will also hope that after investing in the ICO, the price of the token will increase over time and they will be able to double or even triple their investment. The ICO sphere has seen some coins increase in price as much as 150,000%. Ether, which is the second most common cryptocurrency after Bitcoin, had an initial ICO price of just 30 cents per token. Today, one Ether will cost you no less than $150. If you were an investor at the time of its ICO in 2014 and had invested $100, your investment today would be $50k plus.

How are ICOs Different from IPOs?

At a glance, ICOs and IPOs may seem similar. We have a business seeking funding, so people invest and own a part of it. However, looking at intimate details of the setup of each, you will notice that IPOs and ICOs are two different things. The main differences are in the following three aspects;

a)     Decentralization

By rule of thumb, all IPOs will have to be run by the capital markets authority of a particular country or state and then the securities exchange for valuation and other bureaucratic procedures. This is done to ascertain whether a company qualifies to list on the stock market of that particular state. With ICOs however, all the activities that lead up to the ICO are decentralized, and there is no single body that tries to come in and probe whether a startup is truly about what it professes to do.

b)     Barriers to entry

With an IPO, a company will need to provide proof that it qualifies to list as a public company on the stock market. In most countries, this will take several years and will include a team of experts and other institutions to evaluate the company and come up with underwriting among many other aspects. For an ICO, however, only a whitepaper and proof of concept are required for a company to run an ICO. Investors will read the whitepaper and if convinced of what the company is doing, then move in with their investment.

c)     Nature of the offering

An IPO opens through ringing a bell on the floor of the stock market on the particular day that the stocks of a specific company are offered to the public. This physical proof or nature of conducting business is a huge difference when compared with ICOs. With ICOs, there is no such thing as a bell ringing event on the floor of the stock market. ICOs will be run purely online with investors logging into their virtual accounts to deposit digital currency that is then used to purchase the digital tokens.

How to Choose an ICO for Investment

Just like any other investment that you may want to put your money in, it is essential to scrutinize an ICO before you can buy into it. The following are vital things to guide you on which is the best ICO to invest in.

a)     Transparency – a company that has a clearly stated goal should be the target of your investment in an IPO. The whitepaper that the startup lays out should clearly explain what the company intends to do with the funding it will receive in the ICO.

b)     Exchange platforms – you want to invest in an ICO where you can quickly recoup your investment should you need it. Although the forces of supply and demand will significantly affect the value of your investment, it can get more frustrating if you cannot exchange these tokens for others in the crypto market. Choose an ICO that partners with the most common exchange platforms to help you overcome this inconvenience.

c)     Focus on investor safety – the online sphere is one that is full of frauds as thus, the ICO to invest in should offer some level of protection for you as an investor. ICOs with a concern for investor safety and their confidence will use an escrow wallet for transactions. Look for such ICOs because in case of anything, you can recoup your investment there and then.

Conclusion

ICOs are an excellent option for anyone looking to invest in cryptocurrencies. More than just an economic investment, you have the chance to be part of a social undertaking if the startup in question is working towards achieving a particular goal. It is essential however, to learn about the world of cryptocurrencies and how they work. Additionally, knowing the difference between an ICO and IPO can help you to better gauge, which is the right ICO to invest in.


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