An ICO, or Initial Coin Offering, is a way for startups to raise money by inventing and issuing a new type of digital money. Normally, early investors become part owners of a startup. With an ICO, investors receive this new currency instead, which could end up being worth a lot of real money or could turn out to be worthless.
During an ICO campaign, crypto “tokens” are offered by the startup behind the ICO to investors in exchange for other cryptocurrency, such as Bitcoin or Ethereum. The token, or “coin,” is issued on the blockchain, a secure distributed ledger. These tokens only become currency if the funding goal of the ICO is met.
What happens during an ICO campaign:
Before selling their tokens, a startup generally issues a white paper, which tells prospective investors about the company and how the ICO will work. An ICO white paper typically includes details on:
Just like a kickstarter crowdfunding campaign, supporters of an ICO have the option of helping a company meet its funding goals. Unlike a Kickstarter campaign, however, backers of an ICO are keen on getting a financial return on their investment.
Here are some of the ways ICO investors may be hoping to earn a return:
The new cryptocurrency could take off over the long term, earning investors Bitcoin-sized riches.
Early ICO investors may receive a discount compared with later investors. Some investors may buy in early and hope to sell their position quickly when the price is higher.
The currency could have some kind of redeemable value with the issuing startup. For example, a gaming startup might create a currency that can be used for purchases on its gaming system.
ICOs offer many benefits for startups, including:
Some investors have been ripped off by ICO scams. An ICO may be advertised online but then disappear after raising money for a few days. At the same time, there have been success stories of legitimate companies that are building promising products and have used ICOs for funding.
Some ICOs fall between these extremes. Some companies may turn to an ICO because they can’t convince VC firms or other traditional sources of funding to make an investment. Those companies might not be complete scams, but they also might not be 100% grown-up companies with real business plans.
|Chance to get in on the ground floor of a successful startup||Poor disclosures, as white papers may be incomplete or falsified|
|Backers may enjoy being part of a disruptive movement||Lack of regulation|
|Possibility of making a lot of money||May have difficulty exiting an investment|
|Risk of hackers stealing funds|
|Value of tokens can fluctuate wildly|
|Risk of outright scams|
ICOs are controversial. Believers say they can offer a more efficient way for startups to raise money. Skeptics say that the ICO market is a fraud-ridden bubble. What both sides can agree on is that investing in an ICO is a high-risk gamble. As with any extreme-risk investment, ICO investors could stand to make huge profits or could lose everything.
An ICO is a popular but controversial new way for startups to raise funds. In exchange for investors’ money, a startup invents a new type of online currency. Supporters say that ICOs offer efficient ways for startups to crowdsource early investments, while skeptics say they are hotbeds of fraud. Investing in an ICO is extremely risky.
Ratings of ICOS: https://icorating.com/
Comprehensive list of ICOs, crowdsales, and token sales: https://www.icoalert.com/
A video explaining what an ICO is, by The Blockchain Guys: https://www.youtube.com/watch?v=v9uFp_XavVw