What are Initial Coin Offerings (ICOs)?
Even if you’re new to the cryptocurrency scene, you’ve probably heard the term ‘ICO’ thrown about - the cryptocurrency community certainly like their acronyms!
But what does it mean, and why does it matter?
Not too long ago, Bitcoin was a little-known fad whose main proponents were technology and cryptography enthusiasts. Achieving mainstream recognition and, to a certain degree, acceptance, has taken years.
Today, new coins are launched about as often as new reality TV shows and initial coin offerings (ICOs) are the driving force behind this.
So, what are they?
Essentially, an ICO is the first opportunity to purchase quantities of a newly launched cryptocurrency. In this sense, ICOs possess a lot of similarities with crowdfunding and Initial Public Offerings (IPOs) for more traditional investments.
How does an ICO work?
ICOs work in quite a simple way:
A crypto project makes its new digital currency available to buy in a pre-release sale.
The project sell quantities of the new coin for fiat currency or other coins such as bitcoin or ether. Depending on the project and the hype surrounding it, it’s possible for this offering to raise colossal sums of money in minutes.
In most cases, buyers sign a ‘smart contract’ – a computer protocol (or set of rules) designed to enable parties to digitally sign and verify an agreement. This ensures that they receive the appropriate amount of cryptocurrency upon its official launch.
These coins can only be used by buyers once the project becomes live. For example, new purchasers bought Ether in a pre-release sale, but then couldn’t use it until the genesis (first) block of the Ethereum blockchain.
ICO adopters hope to benefit from an increase in coin value as it becomes available on cryptocurrency exchanges and market platforms.
The first ICO was launched by OmniLayer (then known as Mastercoin) in 2013. Ethereum’s ICO was held in 2014 and it raised enough funds to successfully launch Ether which, at the time of writing, is the second largest coin in terms of market capitalisation. Each offering has different rules regarding the total supply of tokens and the rollout period, but ICOs typically last for a week or more.
Whatever the format, ICOs are very popular – many websites are dedicated to identifying and tracking them as they are announced and as they occur.
Are ICOs regulated?
Currently, ICOs are in something of a legal limbo. Most aren’t regulated by the Financial Conduct Authority and many occur overseas.
That essentially means that fraud and financial misconduct is a real risk – so much so, in fact, that it has led to outright bans of ICOs in China and South Korea. Some argue that the lack of regulation has encouraged innovation and that many of the highly successful coins would have been stifled in a stricter legal environment.
Should you buy into an ICO?
Well, that depends. Whether you buy into an ICO depends on whether you like the concept behind the coin enough, whether you trust the people involved and whether you’re prepared to lose your capital investment should things go poorly.
Newcomers to cryptocurrency may prefer the relative comfort of trading in established coins such as bitcoin, ether and Ripple’s XRP token. More experienced and adventurous traders may favour an ICO.
A lot of money can be made (or lost) through participating in an ICO. It ultimately comes down to the coin itself.