Initial Coin Offering: What’s That And Why Should You Care

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Initial Coin Offering Whats That And Why Should You Care

Property, stocks, bonds and futures. Make a guess which is the most profitable asset class since the start of the year. If you thought that it was property or stocks, you are probably not the only one. But guess what? None of these traditional asset classes is the most profitable.

Instead, it is cryptocurrencies that are taking the top spots in terms of investment returns. Yes, that’s right! Those who invested in cryptocurrencies like Bitcoin, Ethereum and Ripple have multiplied their investments since the start of this year. Virtually any cryptocurrency that you invest in would have made you a substantial amount of money. Here are the year-to-date performance (accurate at the time of writing) of the 5 largest cryptocurrencies in the world right now:

  • Bitcoin: 590%
  • Ethereum: 4,613%
  • Bitcoin cash: 444% (only began trading since 1st August 2017)
  • Ripple: 3,248%
  • Litecoin: 1,610%

And if you are thinking about investing in cryptocurrency, there’s one important jargon that you need to grasp: ICO.

bitcoin

What is ICO?

A hybrid of IPO and crowdfunding

If you are familiar with investing, then you should be familiar with initial public offering (IPO). IPO, as you might know, is the process of selling shares in a company to the general public for the first time. Initial coin offering (ICO) builds on a similar concept. However, instead of selling shares in a company, the company sells virtual tokens that can be used in the project that it is trying to build.

Yet, at the same time, ICO is also like crowdfunding. ICOs target early supporters that are keen to invest in a new project, which is similar to a crowdfunding event. One slight difference between ICO and crowdfunding is the motivation for supporting. ICO supporters are motivated by a prospective return on their investments, while those raised in the crowdfunding campaigns are motivated by the finished product.

What happens during an ICO?

During an ICO campaign, the company usually sells a percentage of the cryptocurrency to early backers. In return, early backers provide the capital required for the company to build its proposed project. The company usually creates a plan on a whitepaper.

The whitepaper primarily states what the project is about and what need(s) the project will fulfil upon completion. It will also reveal related ICO information to investors, e.g. How much money is needed to undertake the venture; How much of the virtual tokens the pioneers of the project will keep for themselves; What type of fiat currency is accepted; And how long the ICO campaign will run for.

So why should you care?

The technology behind cryptocurrency could revolutionise the world.

The name of cryptocurrency is derived from the underlying technology that powers it. Though it sounds like jargon, cryptocurrency is an encrypted decentralised digital currency transferred between peers and confirmed in a public ledger. This public ledger is known Blockchain.

Blockchain is simply a public digital, decentralised ledger that keeps a record of all transactions that take place across a peer-to-peer network. This means that a record will be written across all blocks within the network. It cannot be deleted without the agreement of every single block.

Many believe that blockchain technology has a large potential to transform business operating models in the long term. It is portrayed to be the second generation of the Internet, which explains the hype amongst cryptocurrency enthusiasts.

Governments, experts have warned investors to look out for ICO frauds

Various governments and experts have publicly spoken against cryptocurrencies and ICOs.

Jordan Belfort, the famous Wolf of Wall Street, warned that ICOs are “Pump and Dump” schemes. In “Pump and Dump” schemes, the prices are artificially driven higher to attract retail investors. When there are enough retail investors invested, the “early buyers” will dump their asset to unknowing retail investors.

Jamie Dimon, CEO of JP Morgan and veteran banker, also claimed that Bitcoin and other digital currencies are fraudulent. Very recently, Mark Cuban advised that Bitcoin is “still very much a gamble”, and you should only invest if you have spare cash that you can gamble with.

And it is not just experts that are worried. Governments are showing the same concern as well. China introduced a blanket ban on all cryptocurrency exchanges, startups and wallets. In short, anything related to cryptocurrency is deemed illegitimate in the eyes of the Chinese government. This is part of the Chinese government’s plan to weed out fraud and ponzi schemes.

A fine line between investing and speculating

The potential of blockchain technology to economic activities is enormous. If you managed to participate in the right ICOs and support the right projects, you could be in for a windfall.

It is, however, important to watch out for frauds and ponzi schemes. While it is not to say that all ICOs are fraudulent, it is important for you to do your own due diligence. You should not invest in an ICO just because everyone else is doing it.

Think that perhaps you might want to start with more traditional investing? Here’s a few articles to get you started:

 

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