Guide: Understanding ICOs (Initial Coin Offer)
ICO is the abbreviation for Initial Coin Offer (Initial Coin Offering, in free translation) and consists of the issuance of cryptocurrencies, or tokens, by companies for the purpose of raising capital.
Although it is an unregulated way of raising funds, until the first semester of 2017 this type of financing generated more than 1 billion dollars according to the Coindesk website, firing ever since.
In this exclusive guide from the Cryptoeconomics Portal, you will understand how each step of this process happens, which, although it is becoming increasingly popular, raises many doubts.
Understanding step-by-step
- A company, usually linked to blockchain technology, decides to create and sell its own cryptocurrency to raise funds and finance its operation;
- To convince people to buy them, this company publishes explanatory documents and publicly exposes the directions they will take after capturing the money from the sale of the newly created cryptocurrency;
- Those cryptocurrencies, which in these cases are called Tokens due to their generalist nature, they are offered for sale in a specific window of time, such as a month or more. It is common, in the first days of this stage, that bonuses are offered to boost sales;
- Investors interested in buying these Tokens can do so from a exchange or directly on the company's website. Payment takes place via Bitcoin, Ether or other cryptocurrencies;
- After the sale of Tokens, a free market is created. Investors start to buy and sell them from other people and, depending on supply and demand, the values increase or decrease;
- In general, investors obtain results in two ways: in the free market, selling Tokens acquired from other investors, or with the benefits offered by acquiring them;
- The benefits are diverse. Some companies link, for example, a percentage of their profits to the tokens, making them a kind of securities, where you can earn income. Others allow services, such as file hosting and the use of computer resources, to be paid exclusively with them.
Cautions when investing in ICOs
Now that you understand how ICOs work, you may be thinking about starting to make your investments in this area. Although it is possible to make a profit and there are even specialized investment funds, there is little care.
Unlike traditional investments, there is no regulatory body behind this practice. If on the one hand this is a technological advance of the so-called Internet of Trust, it is also difficult to recover your money in case of fraud.
Therefore, investing in an ICO requires minimal understanding and knowledge about the target market in which the issuing company is or will be. Failure or inability to execute the proposed plan can cause your asset to be totally illiquid.
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