What is ICO
This year, ICOs have proven, like never before, that they are a large addition to the cryptocurrency market. With ICOs like Tezos and Filecoin crossing the 200 million dollar mark, it’s not strange to think that ICOs are a great source of potential income, not only for the project’s team gaining the profits of the ICO, but also for the investor. In this article you will be given a full explanation on what an ICO actually is.
Initial Coin Offerings
The term “ICO” is short for “Initial Coin Offering”. This is basically the initial sale of a token/coin belonging to a certain product they want to release, which is the most used mechanism for crowd-funding in the cryptocurrency world. The project’s team gets the profits of the ICO for Research & Development and the investor hopes the project will be successful and could make some extra money when the coin/token gains value.
A standard example would be of a project called X. The team of project X needs money to develop their product, the X-product. To obtain the necessary money, they decide to organize an initial coin offering, in which people can buy tokens for a certain price. If they need $300k for development purposes, they could do an ICO of 4 million tokens for $0.10 each, to get $400k ($300k + $100k reserves), so they can develop their product.
The investor makes profit through the advantages a token offer. The token could gain value, thus allowing the investor to sell it to make money, the investor could be paid a share of the company’s profits every month/year and more possibilities allow the investor to make some money from the ICO of project X as well.
Advantages for the project and its team
A large advantage of ICOs is that they allow the team of a project to get the money they need to develop their project relatively easily and quickly.
As the cryptocurrency market is an industry in which many billions of dollars are being played around, the chance of your ICO being successfully funded is quite high, as long as you have a good plan, a good team and an attractive project.
The high money potential ICOs offer also allows the team to get a good salary. Even if you use all the money your ICO made for Research and Development of your project, it’s often the case that a team reserves a part of the tokens for reserves, often referred to as “their salary”.
Advantages for the investor
If the project is successful, the value of the token you bought in the ICO could rise a lot and you could make a lot of profit selling it.
Some companies allow the token holders to get a share of the project’s profits. This allows for a lot of profits if the project becomes successful.
ICOs often offer bonuses to investors who invest very early in the project and to those who invest a lot of money into it. This means that not only the success of the project after the ICO, but also the amount the ICO reaches and the time at which you joined into the ICO has influence on the amount of profit you obtain, which in turn, allows the investor to make a lot of profit, even if the project doesn’t even become a success.
Many projects also offer additional advantages to holding the tokens, simply to encourage potential investors to buy (more) tokens in their ICO.
There are many risks to ICOs. These include, but are not limited to the shutdown of projects due to legal problems, the project’s team being scammers and the failure of the project.
We see for example, that China has banned ICOs and most likely there will be more countries to follow that path. Thus it’s very possible that an ICO is unable to continue and then the chance of losing your funds is a bit higher, although you’re probably able to get your funds back in case of such legal trouble though.
The project being a scam is quite likely actually. There are tens of ICOs every month and if you’d invest on totally random ICOs without looking at their team, plans and past achievements, there is a very large chance you’d lose your money. It’s simply a very easy way for scammers to scam a lot of people and gain a lot of money.
There are constantly companies rising up, but at the same time, you have to realize that, at the same time, there is a similar number of companies falling down. This is the same in the world of cryptocurrencies. There is success and failure. If you invest in an ICO, it’s not a scam, there are no legal problems and the ICO finishes alright, there is still a great chance of failure of the project.
How to find a good ICO
First, you should check its thread on Bitcointalk.org. If there is none, don’t invest. Next, try googling the ICO’s name, together with “scam”. Then go to the team and google their names and pictures. If their pictures do not belong to the project’s name, don’t invest.
Next, try going to sites like http://icorating.com/, which gives a great insight of the project. If it’s called a scam on such a site, it’s not necessarily a scam and if it’s called legitimate, it could still be a scam, but it can help you greatly.
Then read its plans, often in more detail in their whitepaper. If it has no whitepaper don’t invest. If you think their plans aren’t going to work, don’t invest. If you have doubts, either don’t invest or ask them on their Bitcointalk thread, email them or contact them through other means. Find the response unclear, insufficient or something else that’s not good, ask for clarification or just don’t invest.
Now that looks like a lot of work, but it really isn’t. Basically it comes down to this: Check its thread on BitcoinTalk, check its rating, google its team and read (parts of) its whitepaper.
As you see, initial coin offerings are a great way to both make money and lose money. As the crowd-funding methods of the cryptocurrency world, they offer tons of advantages, both for the investor’s and the project’s side. Many of them are great opportunities and it’s really easy to invest in them.
Now you know what ICOs are, I hope you are able to invest more wisely in them. Also make sure to check out our own articles on ICOs here on cryptocreed.com. We only publish articles on ICOs we think could become very successful in the future.