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Blog

The Initial Coin Offering

JL Law

In the past, startup companies have only had the traditional methods of raising funds ranging from personal funding and loans to dealing with venture capitalists. The recent marketing revelations in the form of crowdfunding have given companies an entirely new set of options, but neither technology nor finance ever stay in one place for long. There is a new form of fundraising growing with massive popularity in the cryptocurrency communities that is halfway between crowdfunding and the traditional IPO. This new crowdfunding method is known as an Initial Coin Offering, or ICO and high risk, high return investors are going wild for it.

How does ICO Work?

The most distinct innovation of the ICO is that companies gain investment through an established and successful cryptocurrency like bitcoin or ethereum. The company then creates a set of tokens assigned a specific value per coin or fraction of a coin, and investors buy them up in hopes that they will return a much greater value. Often, these tokens are a new blockchain based currency, called altcoins, designed to fill a niche or innovate the industry and integrated into the company's business model. Investors buy in hopes that the new currency, like ethereum before it, will experience a meteoric rise in power and popularity causing the coins they own to drastically increase in value. In other cases, the tokens represent something either more traditional or more creative, from equity, dividends, or voting shares to some special token value that will create profit over time if the ICO company succeeds.

Becoming an Investor

Unlike most other methods for startup funding, anyone can join in an ICO because they require absolutely no investor verification when properly structured. The value of the currencies involved are all that is considered, at the same time skirting all existing regulations associated with traditional investment. Anyone with a few bitcoins or even fractions of a strong cryptocurrency can buy tokens from an ICO offering, without ever having to go through an accredited investor test or be registered in any way other than what the company requires for token redemption down the line.  It's important to note that many ICOs will require accredited investor verification.

Investing in an ICO

If you like high stakes investments, ICOs are the hot new thing. With seemingly no regulations, no laws, and no fiat currencies, the market is pure economics in all its fickle glory but you're not flying blind. When each company posts their ICO, they do so with an announcement and a whitepaper which enumerates their business plan, how they intend to use the money, and what the tokens are worth. It's your job as the potential investor to perform due diligence on the company, their plan, their founders, and the value of their tokens or altcoins.  Note that the lack of regulation is a temporary thing; ICOs can and will be heavily regulated in the near future.  It's already happening now, all across the world.  Depending on the type of token you choose, the value of the token can rise due to trading, the usefulness of the backing blockhcain functions, the success of the ICO project via equity or dividends, or the worth of a unique service as the offering company grows.

Whether you're in it for the potential big cryptocurrency payout or just to get involved in an interesting industry, there are ICOs out there inventing new technologies and making unique offerings.

Coins to Invest With

The current top two crypto currencies that ICOs are dealing in are bitcoin and ethereum. To gain cryptocurrencies, you can either buy them in whole or fractional amounts or mine them. these coins take a custom rig or specific grahpics cards which run blockchain processes that both create new coins and support the currency system. Either method creates blockchain based coins which can be stored and managed from a virtual wallet program. ICO offering companies also have virtual wallets where investments are stored. From there, they can either process the coins you paid into blockchain function requests or cash them out for startup capital in a fiat (national) currency. How you get investment returns, on the other hand, can be in whatever form is defined by the tokens you hold.

Initial Coin Offerings are an amazing new way for brave companies to gain a powerful crowdfunding. Choosing to invest in an ICO is a big risk, but with a chance for both large and unique rewards. While there's no guarantee that any particular project will succeed, if you have a good eye for launching prospects then trying your hand could turn out to be both interesting and profitable.