ICO is one of the buzzwords of 2017.
You have probably heard plenty of stories about companies raising funding with ICO, but if you are like most people, you might feel a bit confused as to how it all works.
What exactly are ICOs, how do they work, and should you invest in them?
What are ICOs?
ICO stands for Initial Coin Offering. It’s a way to crowdfund your project by issuing tokens that can later be used to redeem the value that you are providing. You sell tokens for bitcoins and ethers, people buy them, and you end up with your starting capital.
Let’s borrow an example from Mohit Mamoria, the author of Everything you ever wanted to know about ICOs, who used an example of a mobile game store to explain it.
Imagine that you want to start an app store for mobile games through which people would be able to download free and paid games. There’s definitely potential there. It could become a thriving ecosystem of gamers and game developers. But there’s a problem…
In order for your app store dream to come true, you need money. A lot of it. You’d need to hire software engineers to build the platform, salespeople to get game developers on the platform, and then spend a lot of money on advertising. But your pockets are empty and there are no potential investors in sight. So what can you do?
This is where the idea of an ICO comes in. You realize that you can introduce your own tokens (coins) to your ecosystem. That means that instead of asking gamers to pay in fiat currency like dollars or euros, you’d ask them to pay in your own coins. Then you release the initial (and, often, the last) batch of coins and offer them to the public at an affordable price. If you do a good job at selling your vision to people, they will buy your coins, and you will raise enough money to build your platform.
And this is all done via blockchain. What does that mean? That means that anyone can verify the ownership of the coins at any time. It’s all transparent.
Sounds far-fetched? Maybe. This way of crowdfunding is still controversial, especially given that it’s so unregulated. However, in 2017, ICOs raised more than $1.25 billion, surpassing the capital raised via traditional venture capital investments. So controversial as they are, ICOs work.
What are the upsides and the downsides?
As Sonya Mann summarized in her article “The Pros and Cons of Investing in a Crytocurrency ICO” “Pros: some people are getting rich. Cons: you probably won’t be one of them”.
ICOs offer ordinary people opportunity to invest in early-stage startups, which up until now was the sole prerogative of wealthy venture capitalists. That means that if you get lucky, you could become an investor in next Facebook or Google. And plenty of people want a piece of the pie - money is coming in from all over the world, especially China.
However, not all ICOs are worth investing in, in fact, a lot of them are just pipe dreams, without any legitimate business behind them. There was even a parody ICO called Useless Ethereum Token that managed to raise close to $100k despite openly saying that it’s useless and that people should keep their money. The reality seems to be that we are in an ICO bubble where a lot of money is being thrown at overrated ideas and companies.
And then there’s the fact that ICOs have received a lot of criticism for being unregulated. The Monetary Authority of Singapore (MAS) said that ICOs are “vulnerable to money laundering and terrorist financing risks due to anonymous nature of the transactions and the ease with which large sums of monies may be raised in a short period of time”. Meanwhile, U.S. Securities and Exchange Commission (SEC) mentioned that the country’s securities laws may apply to the sale of new digital coins.
So while there’s plenty of money to be made in ICOs, there are significant risks, such as falling for a scam or having your money used to fund something shady. Meanwhile, the future of ICOs is unclear, because authorities might crack down on them sometime in the near future.
Should you invest in ICOs?
So the question that is on your mind is probably this: should you invest in ICOs?
First of all, you have to understand that investing in cryptocurrency itself is risky, and ICOs are even riskier. As with all high-risk, high-reward investments, you shouldn’t put in more money than you can afford to lose. Don’t sacrifice your financial security and don’t get yourself in trouble by chasing get-rich-quick dreams.
Sonya Mann offers these four questions to ask when evaluating a potential ICO investment opportunity:
- Does this project make sense as a business?
- Is there a demonstrated demand for it?
- Does this business need a cryptocurrency token system to work?
- Can you commit funds without hardship?
If the project you are looking for makes sense as a business, has a demand, and needs cryptocurrency to work, and, of course, if you can afford to, then go and invest. Who knows, maybe you’ll be one of the few people who strike it rich? Just remember, don’t invest any money you are not willing to lose!
How to invest in ICOs?
Okay, so, you decided to give it a try and invest in an ICO. Where should you start?
Here are the three main steps that you need to follow if you want to invest in ICOs:
- Get bitcoin or ether. You can do that on the leading cryptocurrency exchange called Coinbase. Simply connect your bank account or credit card, buy the coins, and then give your bank a few days to process it.
- Move your bitcoin or ether to a wallet from which you can participate in ICOs (you can’t use Coinbase wallet). Using ether? Go to My Ether Wallet or Parity. Using bitcoin? Blockchain is a good choice.
- Send your cryptocurrency to the ICO address. Now that you have both crypto and a good wallet, simply send the money to the ICO address, and they will send you tokens. Congratulations, now you own ICO tokens!
As you can see, the process is pretty straightforward, just make sure that you choose an ICO to invest in wisely, get a wallet that supports ICOs (otherwise your tokens will be sent to, say, Coinbase instead of you), and send your money to the exact address that is provided by the company that is doing the ICO (scammers are often trying to get people to send money to their own address instead of that of the company).
ICOs can be a great investment opportunity provided that you invest in real business, not in abstract ideas.
Just be careful. There are plenty of scammers out there who see the current ICO craze as an opportunity to fleece people out of their money. Always make sure that you do your homework and understand the project well before investing in it. Diligence pays off!
And, of course, remember that ICOs are not only high-reward, but also high-risk investments. Never invest any money that you can’t afford to lose!