Everything You Wanted to Know About ICOs (But Were too Afraid to Ask)
One of the topics that’s all over the news these days is initial coin offerings, commonly referred to as “ICOs.” There’s still a lot of both mystery and interest surrounding the topic and it can be confusing. There’s a lot of information investors need to know before getting ready to hand over any funds. What is an ICO? What are the benefits? Can I participate in one? Let’s answer all of those questions (and more) and you’ll be ready to start doing some due diligence with ICOs explained simply.
ICOs Explained: What are They?
Before looking at any of the investment opportunities, we first need to understand what an ICO actually is. ICO is an acronym for “initial coin offering.” Now that sounds an awful lot like “initial public offering,” doesn’t it? Well, that’s for good reason, because that’s essentially what it is, but in the crypto world.
Like an “initial public offering” (IPO), an ICO is a form of fundraising, only instead of stocks, the company is offering coins. The idea is simple:
1. A company needs to raise money for a project
2. It’s difficult to get seed funding from traditional investors
3. One of the easiest ways to get funding is to utilize “crowdfunding” (think Kickstarter, GoFundMe, etc.)
4. Multiple crypto platforms allow companies the ability to issue their own tokens like Ethereum, BitShares, and Waves.
And so the company decides to add all those factors together to start a project. The company will advertise the new project they’re working on. Whether it be a new platform for trading, a blockchain product to help with merchandising and inventory, or something unrelated to blockchain technology, companies can sell coins and tokens (kind of like a stock) to raise money. Just like with an IPO, the issuing entity sets a specified amount of coins to be released and then there is an initial offering. In the initial offering, enthusiastic investors typically purchase coins with fiat (like US dollars) or another major cryptocurrency like bitcoin (BTC) or ether (ETH).
The launching of the Ethereum platform made it easier than ever for companies to launch an ICO of their own (even without any prior blockchain experience). Nowadays, there are even other options for potential issuers to choose from to create their very own token. With ICOs explained, let’s look at some of the other reasons they’re beneficial.
What Happens After?
After the successful ICO, the issuing authority uses the money raised to begin working on their project or product. All of the purchasers of the coin (the investors who participated in the ICO) then either hold on to the coin or token (in case it serves a purpose for the upcoming product) or can begin selling and trading them on the open markets.
In some cases, the coins being sold will actually serve a utility on a future platform. If that’s the case, then investors wanted to purchase the coin in the earlier stages so they can get a good price on the tokens for the product launch. We’ll discuss the difference between utility tokens and equity tokens in another post later this week. If the token does not serve a utility, then it will stick to being traded. If that’s the case, investors bought the coin in hopes that it would increase in value over time.
What are the Benefits?
The nature of the coin is what decides the answer to this question. Those who bought the utility tokens will use the tokens for their intended purpose. Investors gain early access to the coins (and typically a better price) so they can be used at a later date. With non-utility tokens, sometimes called “equity tokens,” it’s a little different.
For the coins not serving any utility, investors purchased them banking on price speculation. These coins are incredibly similar to stocks, they don’t really “do” anything—they just…exist. Think about this situation like a share of stock: an investor owning 2 or 3 shares of Google stock doesn’t receive any added privileges. Instead, the reason an investor buys Google stock is because they believe it will go up in value over time. Likewise, investors do the same with some cryptocurrencies. (Note: Investors don’t treat all cryptocurrencies this way)
Can I Participate in an ICO?
Yes! But also…no. So this one is a bit tricky to answer and so the best response (though the one no one likes to hear) is: it depends.
Even though we now have ICOs explained simply, that doesn’t mean getting involved is simple. Because of the unclear nature of their status, ICOs are a bit murky in legal terms. If you’re outside of the US, then there typically won’t be much trouble. American investors, on the other hand, are not so lucky.
Since the US Securities and Exchange Commission (SEC) and other regulatory agencies haven’t quite figured out what to do with cryptocurrencies, there isn’t a clear answer (yet). Luckily, this is one of the main topics for discussion in the US financial regulation conversations (very exciting stuff, right?). Right now, it’s looking like most Americans can’t, at least until new legislation has been passed. Now, if you’re an accredited investor in the US, then there’s definitely no issues. But for the rest of us in the US, it’s probably best to hold out or ask a professional.
Since we’re not legal professionals here, it’s always best to check with your local financial adviser or check out the SEC’s new page for ICOs.