ICO. It’s one of many acronyms of the moment that you either get or you don’t. The initials stand for ‘Initial Coin Offering’, but that will leave a huge number of people none the wiser. Initial coin offering for what? Well, it’s all to do with cryptocurrency – those made-up virtual tokens, which have somehow managed to take on a value all of their own, to be worth something not only online, but in the real world too.
The total value of all Bitcoin in circulation, for example, now stands at US$96.7 billion. That’s more than the stocks for Goldman Sachs and Morgan Stanley.
If you’re looking for new and intelligent ways to invest your money, then ICO could be an interesting option for you. First, however, you need to know what you could potentially be getting into. So, here’s the low-down, from us to you.
The Five Things You Really Need to Know About ICO
What is an ICO and what do they do?
An ICO is, essentially, a way of raising funds for a business (or any other kind of venture), using cryptocurrency. It can be based upon a token system, or involve the launch of a new currency.
There’s nothing stopping anyone from launching their own cryptocurrency, but of course, any currency is only as valuable as other people think it is, so if the business the currency is based upon flops, then that particular currency probably won’t be around for long either. You need to make sure that the crypto you invest in doesn’t turn out to be a fly by night so choose one with history that is reputable, and that’s where research comes in.
In the last year or so, the governments of the world have started to pay attention to cryptocurrencies and ICOs, and various regulations are creeping in, depending on location – Russia recently banned Bitcoins, but then announced the launch of the CryptoRuble, while Switzerland has published a code of conduct for ICOs, which they’re encouraging other countries to adopt. This doesn’t just help to protect potential investors, but also begins to validate to this form of funding, helping to future-proof it and add a further layer of protection.
How does ICO work? What are tokens?
If a company is searching for funding and they don’t want to pursue traditional paths, they can either create their own cryptocurrency, as above, or create virtual tokens, rather like shares which can – eventually – be floated on the virtual equivalent of the stock exchange.
Once these tokens have been created, investors are invited to purchase them, using a stipulated cryptocurrency – Ethereum, Bitcoin, Litecoin, Zcash, Ripple, or any other currently in existence – and the resulting funds will be used to purchase whatever that particular company needs to take it forward.
Once all tokens/virtual coins are sold, they can be bartered on the open market. If investors have bought well, they could find themselves with a significant asset to their name. Bitcoin infamously exceeded the US$5,000 mark recently, while having started the year at US$1,000, Ethereum is currently valued at US$325. Invest wisely, and you can turn a profit extremely quickly.
Why are ICOs so popular?
See the last sentence above!
For investors, ICOs have the potential to bring in the bling, fast. But on top of that, they also present a new and exciting way to make money. At the moment, cryptocurrencies provide a far greater opportunity to gain a really significant return on investment, than practically any fiat proposition. Interest rates are low, and it takes a serious amount of luck to find a future business giant looking for an angel investor to get them started.
ICOs also provide the chance for investors to become involved in cutting-edge, developing tech companies that they wouldn't ordinarily be able to gain access to; these are not propositions that you're going to find on the stock market; at least, not until they're so huge that the average man or woman will be unable to afford shares.
On top of that, ICOs double your potential for making a profit, because to take part you first need to purchase the relevant cryptocurrency, which is an investment in and of itself.
For businesses, ICOs have the potential to bring in funding, fast. Starting an ICO isn't an easy option, in fact it takes a serious amount of groundwork, but it does deliver a flexibility that fiat options lack. To start with, the currency itself is dual-purpose: it can be used as is to finance virtual services; or it can be exchanged for cash. Secondly, it is scalable. Thirdly, it by-passes much of the red tape associated with established venture capitalism.
How can you invest in an ICO?
This is essentially a five-step process:
- Firstly, open a crypto account at a reputable exchange – you can find a full list here – and purchase your currency of choice.
- While you’re there, set up a crypto wallet to securely hold your funds while you decide what to do with them.
- Next, find an ICO that you want to invest in. Token sales are usually announced for limited periods, on the dedicated company website. Follow the instructions issued. Do not follow external links posted elsewhere purporting to sell tokens, as you may well find yourself the victim of a scam.
- Once you’ve made your purchase, make sure that you have somewhere to store your tokens: if you put a £50 note through the washing machine, it’s near-impossible for you to replace it. The same applies if your laptop storing your cryptocurrency meets a sticky end via a glass of merlot, so take precautions. A dedicated external hard drive/USB and a safe deposit box are strongly favoured by serious investors. Creating a paper trail – tracking serial numbers – is also wise.
- Finally, keep an eye on how the company is doing. If interest is soaring, keep hold of your tokens. If it looks like its wavering, it may be time to sell on.
This is really all about due diligence, so research the company and make sure that you’re not just investing in airy promises.
So, what’s the secret here? Simple common sense:
- Find viable projects – the internet is positively heaving with ICOs vying for your hard-earned, but most of them will be non-starters. Don’t just rush in headlong; read the propositions, ask to see the White Paper; look closely at the business information and assess how feasible the project seems – as a customer, are they offering something that you might be interested in?
- Assess the capital structure – Take a look at the capital/token structure. If it errs on the side of vagueness, don’t go there. You only want to work with companies that know what they’re doing and have a solid fiscal infrastructure, because they’re the ones that will most likely succeed.
- Look at the management team – It's worth taking time to do some background checks on the team who are fronting the project. If their names are linked to a succession of ‘entrepreneurial ventures' without any previous success, they're obviously doing something wrong and would be a risky pair of hands to put your capital into.
- Find out where your investment is going – Do the management team have solid plans for the proceeds of the ICO, or is this just an issue of cash flow? Ideally, you want your investment to be put to good use; it needs to be used for forwarding, growing the company – that’s the only way that your investment will grow too.
- Does the company have a roadmap – This links to the previous point. If a company is going to get anywhere, the people in charge need to choose a direction. If it’s not clear in the White Paper, ask if they have a commercial plan that you can see – it’s your money that you’re potentially investing, if the company want you on board, they’ll be more than happy to share their vision.
Investing in cryptocurrency can feel like a risky business. And yes, of course, it does carry some risks. But then, so do all forms of investment. Buying tokens in an ICO carries all of the same risks as buying shares in a company floated on the stock exchange. The difference is that ICOs are younger, so it’s easier to bag a bargain.