ICO Basics for the New Crypto Investor

ICO Basics for the New Crypto Investor

This is a Guest Post by Catherine Tims of the Bitcoin Exchange Guide.

You’ve seen the writing on the wall – the newest, hottest, and most lucrative investment opportunity is here. It’s called “cryptocurrency,” and you want to know more. Of course, it would help if you knew exactly what cryptocurrency was in the first place!

But there’s good news if you want to become a crypto investor. As the cryptocurrency industry continues to develop and evolve, it’s becoming increasingly easier to invest. Barriers to entry are slipping away one by one, which has had a democratizing effect on crypto adoption and investment – and one of the increasingly common developments today is the initial coin offering (ICO).

ICO Basics for the New Crypto Investor

How the ICO is Changing Crypto Investment

Once upon a time, cryptocurrencies were only developed with one goal in mind: to create a new, decentralized, and unregulated form of currency that existed independent of geopolitical lines on a map. Beholden to no government and suitable for international trade and commerce online, crypto coins like Bitcoin were designed purely as money; the technology behind these coins – their blockchains – did nothing else besides managing the creation of these currencies as well as track their transactions.

Today, blockchain technology is much different. Developers have advanced beyond simply programming the rules of how a cryptocurrency works and have adapted the technology to run entire suites of software programs through smart contracts and decentralized applications (DApps). This new generation of blockchains, and their currencies, can be used to create and power whole online platforms ranging from social media to e-commerce.

A Crowdfunding Campaign for All Seasons

The problem is that these highly ambitious projects require funding to develop properly. In traditional venture capital funding, this would require taking out business loans or seeking deep-pocketed investors who pony up development funds in exchange for massive stakes in the company. However, blockchain development is still so new and untested that traditional VC funding is usually an impossibility, as no one’s willing to take such massive financial risks.

This is where the ICO comes in. The company or organization behind the new blockchain-based project holds a crowdfunding event, but without having to use platforms such as Kickstarter or Indiegogo – instead, they sell digital assets pre-mined by their blockchain and use the revenue to fund development. This works much in the way a company that gets taken public sells shares of its business to traditional investors – it’s no coincidence that “initial coin offering” and “initial public offering” sound so similar.

What are the Benefits of an ICO?

Why would investors consider purchasing cryptocurrency through an ICO? There are more than a few advantages, first and foremost being it’s likely going to be the quickest and easiest way to invest in a new digital coin. For those hoping that this new asset is going to be a speculative investment, buying in early and holding represents a path to potential wealth, especially since a large proportion of companies holding ICO events structure the offering to encourage early adoption by selling coins at a heavily discounted rate.

This isn’t the only way investors can be rewarded by an ICO, however. Many developers plan their ICO to eventually include a buyback period if the valuation of their coin reaches a specific milestone. This is meant to reward investors for their faith while simultaneously treating purchased coins in the way a more traditional investment would operate, not unlike a certificate of deposit or bond reaching maturation.

The other benefit to investing in an ICO – one that isn’t purely speculative – is that this provides development revenue for the company or organization to develop its DApp or platform. The coins investors already have in their wallets can then be used in the platform’s environment once development is completed, enabling them to buy whatever goods and services other users are offering.

Pay Attention to the Possible Pitfalls

Truth be told, most ICO investors are less concerned with using the platform they invest in than they are with the speculative nature of their investment. This is, unfortunately, one of the negative aspects for companies who wish to use the ICO as a crowdfunding event – unlike a Kickstarter campaign, where people are more likely to invest if they’re passionate about the project, ICOs primarily attract individuals who want to turn a profit.

There’s nothing inherently wrong with this. However, it does mean that many who participate in an ICO aren’t as emotionally invested in the success of the underlying company as they are with the valuation of the company’s cryptocurrency. If the value of their coin hits a specific milestone or threshold, there’s always the possibility that an investor of this type will cash out by selling his or her stock of coins – and when large-scale ICO investors do so, this can lead to some precipitous price drops that can cause a bear run, wiping out large percentages of value.

While such events pose a large risk to other investors, this isn’t the only one that ICOs represent. ICO scams, in fact, have become a major risk – it’s increasingly easy to develop alternative cryptocurrencies specifically to defraud investors by promising the moon and then purposely never delivering. Even legitimate companies run the risk of having an ICO that never leads to anything, making ICO investment inherently high risk – especially since cryptocurrencies are entirely unregulated.

Still Worth It, Despite the Risks

Yes, investing in an ICO carries a large amount of risk. In many cases, this is enough to scare off even the most intrepid investors. Yet despite this, there’s still an allure to an ICO that’s practically irresistible, especially considering how much potential there is for growth – provided you choose the right ICO.

Much like how traditional crowdfunding campaigns have led to some truly spectacular products, ICO-funded online platforms have this same potential. Like any emerging platform, there are bound to be hiccups, so follow the universal high-risk rules when it comes to ICOs: 1), never invest more than you can afford to lose, and 2), if it sounds too good to be true, it probably is.

Author: Catherine Tims is a freelance writer for Bitcoin Exchange Guide . After receiving her Master’s degree in English Language and Linguistics at the University of Arizona, she taught writing to graduate students at the University of Illinois/Champaign-Urbana. She has her own writing business, Ivy League Content, and freelances full time for business clients who need highly-researched articles.