What is a cryptocurrency ICO? Easy explained guide + pros and cons 2021
You have probably already heard of the famous cryptocurrency ICOs. We explain easily what they are, how it works, who can request them, and why or not to invest in ICOs …
What is a cryptocurrency ICO?
An ICO (Initial Coin Offering) is basically a way to finance a blockchain project to get it going.
It works as follows:
Let’s say you have the idea of the century and you want to start a company. For this, you need cash flow, so you create a plan and present it to the bank with the intention of obtaining financing for the project.
The world of crypto works in a similar way. You want to set up a platform and for this you need money, so you develop a plan (known as a White Paper) where you detail how the system works, what benefits it brings, and, in short, why someone would have to invest in it.
From here, you ask the community to finance your idea, either with cryptocurrencies or real money and in return, investors receive your new tokens.
If you notice, and unlike an IPO (initial public offering), you reward your investors with tokens and not with shares of the future company.
As you can imagine, an ICO offers many opportunities, not only to potential companies but also to traders who benefit from tokens at very low prices and that in the future could grow and gain value if the project is good.
The counterpart of all this is that you would be investing in a project that can go wrong and lose your money. In addition, all this without counting the hundreds of scammers and hucksters that flood the network and only seek to scam the unwary.
Who can launch an ICO?
Since this sector is not regulated in practically any country, the world of cryptocurrencies and especially ICOs is still a no-man’s-land.
Of course, do not think that it is an easy task because:
- You have to define if the ICO will really add any value to your business.Let’s say you have a greengrocer and most of your customers buy in the store. In addition, most of them are people of a certain age and do not understand tokens, not even when they buy online.
In this case, developing an entire blockchain infrastructure and tokens for your e-commerce could be a bad idea.
- You have to know quite a bit about blockchain technology and cryptocurrencies. Although creating a token is becoming easier (you can do it directly on platforms such as Ethereum and Waves), the management and maintenance of the entire project also require high technical knowledge.
- You have to write a White Paper as God intended. This document not only captures your entire business plan but is also in charge of selling your product, your business.Investors will assess the project based on the White Paper to decide whether it is worth it or not. And in the meantime, you also have to seek legal advice so that your business is in order.
- You have to make your ICO known. How? through various marketing channels.You have already created your White Paper, now you must reach the general public to invest in your project and this is not an easy task either, since you need time and staff resources and, probably, also an initial investment.
For example, you can advertise on social networks like Facebook, YouTube, and Twitter, ask bloggers to write a review about your ICO, be present in cryptocurrency forums, write your own content, etc.
Why invest in an ICO? The 5 most successful ICOs in history
Surely you have ever heard the founding legend of Bitcoin.
The token had a real value at the same moment that Laszlo Hanyecz, an enthusiast of new technologies, made the first transaction in history with BTC in 2010: he bought two pizzas at Papa John’s for a value of 10,000 bitcoins (at the exchange then only $ 30).
To this day, we can say that the pizzas came out for about 500 million dollars (they had to be quite tasty).
As you can imagine, here lies the interest of investing in ICOs: on the one hand, you finance new projects and on the other, you can benefit (and a lot) if the business is successful.
This is what happened to some of the most popular blockchains in the world and they managed to raise millionaire amounts in their ICOs:
The NXT token and its eponymous platform are veterans in the cryptocurrency market.
Its ICO launched in 2013 raised the highest ROI ever: 1,265,555%.
IOTA’s ICO (let’s remember the project based on developing the Internet of Things) launched in 2015 was an overwhelming success that raised more than $ 400,000.
In proportion, this represents an ROI of 424.084%.
The NEO ecosystem, popularly known as Chinese Ethereum, also launched its ICO in 2015 and obtained stellar fundraising: more than $ 500,000, which was an ROI of 378.453%.
Pros and cons of investing in an ICO
It is a good way to finance a project without having to apply for credit from banking institutions.
An investor can reap great benefits if the project goes ahead.
ICOs are highly speculative and tokens volatile.
They are high-risk investments and you can lose everything invested.
They are not regulated, which is an advantage for many. However, this does not mean that the control bodies have not been working on a regulation for years. In fact, the US SEC already intervened an ICO in 2017 and the EU among others is also trying to regulate the cryptocurrency markets.
There are many ICOs that are directly SCAM.