We have been talking about the ICO for years but it has not been until recently that everything that has to do with cryptocurrencies has reached a special dimension. ICOs are just one more aspect of cryptocurrencies, but very important, since it has to do with their birth.
What is an ICO? What is it for? What advantages does it have? Is it safe to participate in an ICO? We will try to explain all this in the simplest way possible.
But what is an ICO?
ICO is an acronym that means Initial Coin Offering, that is, initial offer of currency. The acronym ICO is very similar to the IPO, Initial Public Offering (which in Spanish is called OPV, public offer of sale) term used when a company goes public and wants to offer shares to potential investors in exchange for money. And it is that the ICO has to do with the financing of a business project.
Financing a cryptocurrency
In the case of an ICO, what is to be financed is the birth of a new cryptocurrency, in the style of Bitcoin or Ethereum. We have already talked about these cryptocurrencies before. These are scarce virtual tokens, protected by cryptography, which have a value due to their scarcity and demand. These virtual currencies serve both to make payments in a very economic way and to store value, since there are markets where they are exchanged for real money.
The cryptocurrencies are created over time by a process called “mining”. The “miners” make computing power available to the project, which allows the system to work and therefore receives prizes: both the “mined” coins that appear spontaneously and randomly and the commissions they receive when verifying commercial transactions that occur between users of the currency.
When someone decides to create a new cryptocurrency, he first designs it and then implements it through software. Finally, it makes this software available to the community so that the miners who support the activity of the same appear.
The whole process has a cost and one way to finance the project is an ICO. The developers carry out a closed-door pre-mining and offer the new virtual currency in exchange for other currencies that already circulate, such as Bitcoin, and which are also interchangeable for real money in circulation. Therefore, an ICO is to offer some initial investors the new currencies in exchange for money. Hence its resemblance to an IPO, although it could also be said that it is very similar to a crowdfunding, since it is a community of users who finance a project without intermediaries.
Financing a project based on blockchain
Keep in mind that an ICO does not only serve to finance the deployment of a cryptocurrency. The blockchain is a chain of information protected by cryptography and shared by the entire community that allows registering economic transactions within the cryptocurrency.
Although initially the blockchain was only the technology behind the new digital currencies, it can be used for multiple tasks. For example, it is used to perform cloud computing without loss of information, to manage copyrights, to have an unforgeable repository of information and a long list of others. A blockchain allows you to store and modify data in a secure and verifiable way and therefore many businesses adapt well to this technology.
Whenever someone decides to use the blockchain technology for a special use there must be an associated currency (and often it is called a token to avoid confusing the project with a new currency) and therefore an ICO can be created to finance the project, changing these pre-mined tokens for money. The tokens can be used within the project to make payments for specific services.
In the end, both cases of an ICO (financing a cryptocurrency or a blockchain) are very similar. The difference is in the focus of the project (the currency itself or the information contained in the blockchain). The case of a project based on blockchain is very interesting, because although cryptocurrencies are often seen as a passing fad, blockchain is developing as a very useful technology for multiple industries.
What is an ICO for?
It is clear that the objective of the token creator when making an ICO is to raise money. A successful example is Ethereum, which managed to raise 18 million dollars before launching. Of course it was an initial injection of money that came in handy when starting the project.
On the other hand, there are those who participate economically in the ICO. What the participants intend is, of course, to make a profit. Normally, cryptocurrencies rise quickly in price (we do not enter here to assess if there is a cryptocurrency bubble), and who is among the initial participants of a project have greater chances of high profits.
What advantages does an ICO have?
Having the possibility of launching an ICO to finance a project has some advantages. The clearest is that the authors of the cryptocurrency do not have to obtain financing through the usual circuit (banks or venture capital investors). This means that more advantageous conditions can be achieved.
For individual investors it also has an advantage: to finance very innovative companies directly. The usual channel for financing projects is usually not available to private investors or only for very large capital. Of course, the reason that this possibility does not exist is that there is normally a very high associated risk that banks and venture capital funds normally do not market to retailers but to qualified investors (both for strategic and legal reasons).
Is it safe to participate in an ICO?
There are multiple risks of participating in an ICO. The first is that the project does not go well and the coins that are delivered in exchange for money are worth nothing. It is the typical risk that runs when you invest in a business project, so nothing new under the sun.
However in the ICOs there are other problems. For example that the security of the cryptocurrency is not correct and someone manages to steal all the money. The most recent case is that of DAO, where more than 150 million dollars were stolen, money that investors lost. This risk is not negligible.
Another risk is that this type of operation is not regulated, it is outside the conventional financial system. This does not please governments for several reasons: on the one hand because they lose control of money and taxes; on the other because these ICO can be used for criminal activities (financing terrorism, for example). Therefore any day we could see how financing an ICO can be illegal, and in fact in China have already taken that measure, but also in a more democratic country like South Korea.