How Do Crypto Initial Coin Offerings Work?

Ask yourself three questions: Do you have a high tolerance for risk? Do you enjoy following the cryptocurrency markets closely, often on a daily basis? And, do you want to learn more about how ICOs (initial coin offerings) work? If you answered in the affirmative to all three, you probably already know something about the ICO marketplace, the space where investors, speculators, and sellers generate buzz for new alternative coins.

Optimists view the chase for ICO profits as the search for the next bitcoin, while others simply treat the initial coin releases as something close to penny stock shares. Are these trendy investments a good or bad idea? Are they a smart place to park a percentage of your discretionary investing income? To answer those two key questions and others, it’s essential to get a clear idea of how the typical initial coin offering works. Here are the basics.

Key ICO Facts

An ICO is very much like a more well-known money-raising technique, the IPO, initial public offering, by a company that wants to raise early capital for operations and startup. But unlike the IPO, when the same tactic is used for alt coins, the issuing companies don’t sell shares of stock. They sell actual cryptocurrency, which might or might not be worth anything or have usefulness beyond its ability to buy services or goods from that particular company.

Those who are interested in ICO trading often take part in other, similar kinds of financial speculation, like standard IPOs, trading small cap penny stocks, and the use of CFDs (contracts for difference) for trading more established cryptocurrencies. Note that CFDs are derivative instruments and are a much easier way to trade because there’s no requirement to own any assets or create accounts on unregulated exchanges. It’s important to understand the way a typical IPO appears in the market. A startup company announces availability of a proprietary alt coin for a specific or open-ended price. The number of total coins to be issued can either be limited or unlimited.

Like IPO announcements, some ICO media coverage is extremely hyped and garners a feeding frenzy among people who believe that the coin’s price will quickly rise soon after the initial issuance. Some investors make huge profits on these coin releases, while very many more make no profit at all or sustain significant losses. It’s imperative to read the company’s white paper before investing any money into an initial coin offering. The paper includes the vital facts about the state of the organization’s financial health, plans, specific corporate projects such as:

  • What the capital will be used for?
  • How long the owners expect the fundraising to last?
  • How many of the coins (also called tokens) will be retained by the principals of the organization?
  • How much capital the owners believe they need to get a specific project underway?
  • What types of money they will allow investors to use to buy tokens?

Always read the white paper and look for potential trouble spots. ICOs are unregulated, so anyone considering putting their money into one should do as much research on the issuing company as possible and be ready to take on a significant amount of risk. Take the time to study the resumes and bios of all the top people in the organization. Additionally, consider diversifying among several initial coin offerings rather than placing a large sum into just one.