ICO Meaning, Pros and Cons
What is an ICO?
ICO is an acronym that means Initial Coin Offering, that is to say, initial offer of currencies. This acronym ICO is very similar to IPO, Initial Public Offering a term used when a firm goes public and wants to offer shares to potential investors in exchange for money. And exactly ICO has to do with the financing of a business project.
ICO as funding method
Few years ago, hundreds of tokens were created because of how ease they can be developed, and firms have come to realized that they can be used to finance themselves.
It is what is called ICO (Initial Coin Offerings), firms create a token, decide which value will have or what it will be used for, and they presell it uses the money they will make to finance themselves. It is something equivalent to the Kickstarter, but taken to the world of finance as a crowdsourcing.
This method of financing and obtaining of liquidity started to be used in 2014, but it has not been until the last year when it has exploded and started to invest big in tokens generated by the firm.
With this, firms that issue tokens are able to finance themselves without resorting to risk capital, so they do not have to sell part of their company or deal with those who control risk capital.
What are the tokens?
Tokens are coins offered during an ICO and can be considered equivalent to shares bought in an IPO. Also, called cryptos, since they are digital currencies as Bitcoin, Ethereum or Ripple, created on block-chain technology.
Tokens from an ICO will have a value, these tokens will be the equivalent of shares issued in an IPO. Like stocks, these tokens with value will give to the investor by the company or the project, voting rights and, sometimes, a possibility of receiving dividends.
While this will be the greatest comparison of an ICO with an IPO, the vast majority of ICO issue tokens that are an asset that gives investors access to the possibilities of a particular project and not the ownership of the project. Company itself.
Another risk involve is that the security of the crypto might not be be the right one and someone could manage to hack in to the system and steal the money. An example of cases like this was that of DAO, in which they managed to steal more than 150 million dollars from the investors.
It is also important to bear in mind that this type of operations are not regulated by any law, plus they are outside of the conventional financial system. This is a problem that is struggling to be resolved, as they are beyond the reach of governments and this means, they have no control over the money or taxes.
Not too long ago, Korea was considering the possibility of banning all cryptos. This lack of regulation has opened up many debates about whether ICO and cryptos are an illegal system or not, but by now, it is still working and there are many investors who decided to invest through this method.
What is an ICO good for?
It is clear that the the token creator when making an ICO is to raise money. A successful example of this is Ethereum, which managed to raise 18 million dollars before launching. Of course it was an initial injection of funds that came in handy when starting the project.
On the other hand, there are those who acts in the ICO. What the actors intend is, of course, to make profit. The cryptos rise up quickly in price (we will not discuss here if there is a crypto bubble or not), and whoever is among the first actors of a project have the greater chances of making high profits.
Key Features of ICO
- Anyone can join in a project, Autonomous Organization (DAO) or an economy.
- ICOs of currencies generally sell shares in an economy, while ICOs of tokens sell a property right or royalties from a project or DAO.
- The ownership of the tokens does not always give the investor the right to vote on the direction of a project or DAO, with the rights of the investor integrated into the structure of the ICO, although generally the investor will be able to put funds throughout the life of the investor.
- Most ICOs involve the creation of a defined number of coins or tokens before the sale.
- The ICO prices are usually settled by the creators of the economy, project or DAO.
- ICOs might have multiple rounds of fundraising, with currencies or tokens on offer, increasing their value until the launch date, so that the first investors are likely to have greater rewards incorporated within their tokens as an incentive to be among them. first buyers.
- ICOs conclude once currencies or tokens are negotiable on the open market.
Is it convenient to use an ICO?
Investors are surprised with the returns and the increase in the market capital of cryptos. During the past year and although there are some good chances, which in some cases can even be described as incredible, risks are there. This must be considered before enter the blockchain world and especially the ICO.
Any investment, especially those which might give profits of more than 100% in few months, you will find pros & cons.
Advantages of ICO?
Having the possibility of launching an ICO to fund a project has some advantages.
The clearest is that the creators of the crypto do not have to obtain funds through the usual circuit (banks or risk capital investors).
which means that more better conditions can be achieved.
For individual investors, it also has an advantage:
The usual channel for financing projects is usually not available to private investors or only for very large capital.
Of course, the reason why this possibility does not exist is that there is normally a very high associated, which is that banks and risk capital funds normally do not market to retailers but to qualified investors (both for strategic and legal reasons).
Disadvantages and risks of an ICO
It is not gold any token that shines. Almost all the advantages and features that we have just reviewed also have their dark side. These are the risks of an ICO:
Little security for investors. Rarely are there real tests of technology or the business that the company develops. In many cases it is just a project that might work or not.
Uncertainty around the value of the tokens. There is so much expectation before the possible benefits of an ICO that, sometimes, the value of the tokens resides more in the potential demand than in the real product. If this kind of demand does not happen, then the value of the token will not grow.
Volatility of the market. Something that increases its value from 100 to 16,000 and then falls to 6,000 can only be qualified in one way: volatile. Thus, investments in tokens and cryptos require permanent attention.
Unawareness of investors. If not expressly requested, the company that carries out the ICOs will never knows the real identity of the investor. This opens the door for illegal organizations to launder money through the purchase of tokens.
Impending changes in legality. Each country has adapted the ICOs to its legislation. There are hardly any regulatory precedents for this type of instrument. Which does not mean that it is not subject to regulations. On the other hand, following cases such as Switzerland and China cases.
It is expected that in the near two years or less, most countries will opt for specific legislation in this sector.
What to expect of the ICOs in 2018
“It’s not too late to make a fortune with ICOs, ” says Sheffield Clark , CEO of Coinsource.
It was last year when ICO became strong. New firms used them instead of lending their capital to risk capital firms. They issue two types of cryptos in an ICO:
- An utility token, which acts as a discount coupon for the purchase of their products or services,
- A security token, which is something like buying shares.
Utility tokens are the most common. Once issued, these coins are traded in crypto exchanges all over the world.
“Some see it as the new magical funding elixir,” says Clark. “But there are many examples of ICO projects that are instilling a positive change for a community. With the personal financial benefit (to the founders) which is not really of great importance.
These guys are technology geniuses. They want to build something that people will remember and use forever, he says:
“People with brilliant ideas will normally be rewarded.” As well as the people who invest.