One of the biggest trends in cryptocurrency today are Initial Coin Offerings(ICO). It is a method of fundraising where new companies or products sell cryptocurrency tokens in exchange for a cryptocurrency(usually Bitcoin or Ethereum). ICOs are similar in technique to stock market Initial Public Offerings where a company raises funds before it launches on the stock exchange.
The very first ICO was held by Ripple in early 2013. Ripple labs was developing its payment system and created around 100 billion tokens called XRP. The tokens were then sold to raise funds to build Ripple. By late 2013, Mastercoin raised around $1 million funds to create a layer on Bitcoin to tokenize Bitcoin transactions. Ethereum in 2014 sold 1 ETH against 0.0005 Bitcoin and raised over $20 million – one of the largest crowdfunding raises ever. That capital used to build the Ethereum platform.
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After Ethereum’s ICO, they became more popular as a method of raising money for many companies from solar to internet technology and social media companies. There are currently over 50 ICOs held every month. Some of these ICOs are however scams and financial market regulators have stepped in to regulate them. The United States Securities and Exchange Commission(SEC) recently reached a decision to regulate ICOs and only approve from certain companies who pass a test.
What is a Token?
In most ICOs a ‘token’ is created. A token is the value which is exchanged for another cryptocurrency in the hope that the token becomes currency itself and is used to access a service or sold in the future. In similarity to stock exchanges, a token is a stock certificate and is proof of purchase.
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Are ICOs Legal?
The legality of ICOs are a bit sketchy. Most governments around the world have completely ignored cryptocurrencies and this includes ICOs. China and South Korea have completely banned ICOs while Estonia intends to launch its own token and raise funds for its proposed cryptocurrency Estcoins. The United States is in-between both camps as it has begun to regulate ICOs even though it has warned against investments in cryptocurrencies.
Making Profit from ICOs
Cryptocurrency investors now look to ICOs to make sky-high profits. Ethereum was sold at 0.0005 Bitcoin during its ICO and has reached peaks of 0.05 BTC.
On the downside, many ICOs end up in a loss where the cryptocurrency held no value after the ICO because it was dumped just after it launched. Some other ICOs collected funds and did not deliver any value.
Before you partake in any ICO, you should research on the company running it and its founders to be sure they can be trusted.
Disclaimer: This article simply serves as a guide to Bitcoin and is not to be read as guaranteed investment advice. The author and Bitkoin Africa do not take any responsibility for the trading of and the volatility of Bitcoin or any other investment vehicles.