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Within the business world, we have what we call an IPO. Standing for Initial Public Offering, this is the first time a company ventures into the stock market. When smaller companies are looking for funds to expand, they often go public and the IPO is the first chance for investors to get a share in the business. With this in mind, what is a cryptocurrency ICO?
As an Initial Coin Offering, a cryptocurrency ICO is the first opportunity for people to invest in a cryptocurrency and, in turn, this allows the creating company to raise funds before getting started. Rather than looking for funds elsewhere, an ICO will test the market to see if there’s interest in the cryptocurrency much like a crowdfunding campaign. During the ICO, a certain percentage of the currency will be sold to early investors. For the investors, they get either legal tender or other cryptocurrencies such as Bitcoin.
Starting A Cryptocurrency
When answering the question of ‘what is a cryptocurrency ICO’, we should first look at how the process works. For starters, the startup will need to create a whitepaper plan which, much like any other business plan, will describe the main aim of the company, the required funds for the project to launch, what money should be accepted, the length of the ICO campaign, and what percentage of all tokens will be kept by the creators of the project.
How Does It Work?
Once the campaign has begun, all investors will buy the cryptocurrency with either virtual currency or fiat money. Typically called ‘tokens’, they’re similar to the shares found during an IPO. If the company doesn’t get the required support during the campaign, the investors will have their money returned and the ICO will be considered a failure. If the funds are raised within the projected timeframe (normally chosen by the creators), the scheme can be completed or initiated depending on their progress so far.
At this point, you might be wondering why anyone would want to invest their hard-earned money in something with little history. Well, ultimately, the early backers are hoping the company excels after launching and that the small price they paid during the ICO will generate a nice profit as the crypto-coin gains value.
Over the years, we’ve seen some fantastic ICO campaigns with one example being Ethereum. Using Ethers as the tokens, the project was first announced back in 2014. During the ICO, the idea of virtual currency was still relatively new and it raised over $18 million in Bitcoin; once all was said and done, this meant a value of $0.40 per Ether. After going live in 2015, it enjoyed early success and reached a value of $14 per Ether less than a year later. Today, the company is worth billions and considered one of the main cryptocurrencies in the market.
History Of ICOs
If you’ve been following this niche with interest, you’ll know that everything is still relatively new. In fact, the very first cryptocurrency to use an ICO as a distribution technique only occurred towards the beginning of 2013. With a company named ‘Ripple Labs’, they developed ‘Ripple’ and generated over 100 billion XRP token. From here, they were able to sell these tokens and use the funds for their own platform.
Once the seal had been broken, this opened the door for several other companies to do the same including Mastercoin, Lisk, and, as we’ve already seen, Ethereum.
If you don’t have too much experience in this niche, you might be wondering what it all means so we’re going to break down the key terms. By the end, you should be able to answer confidently when anybody asks ‘what is a cryptocurrency ICO’.
As a digital and virtual currency, a cryptocurrency will be secured using cryptography. As we’ve seen, private companies are in charge of distributing these currencies as opposed to the central bank or any other central authority and this is important to remember. With no input from the government, there’s no interference or manipulation. For investors, they normally buy/sell anonymously.
Tokens – As a form of coin, these will be offered within an ICO campaign. Sometimes called crypto coins, they’re essentially the same as shares during an IPO.
Finally, another term you may come across is ‘blockchain’. In simple terms, this is a huge digital spreadsheet recording all financial transactions and all data providing value. Commonly called a ‘digital ledger’, it’s available across a number of computers and the network automatically updates the spreadsheets whenever required. With this shared and updated information, it’s accessible to the world and therefore public and easily reconciled.
Coin ICO v Token ICO
Recently, we’ve seen the words coin and token be used interchangeably with regard to an ICO but there is actually
an important difference to recognize. With a coin ICO, the company is selling participation in an economy. On the other hand, token ICOs offer royalties to a project or a right of ownership.
ICO v IPO
If you come from a business background and are asking ‘what is a cryptocurrency ICO’, we often find it easier to approach the topic in relation to IPOs with which we’re more familiar. Therefore, what are the similarities and differences that exist between the two?
With An IPO, the idea is to sell shares of a particular company; depending on the shares sold and how much you’ve invested, you’ll be a shareholder in the business. On the other hand, ICOs are different because they sell rights for this particular project as opposed to the company as a whole. Unfortunately, this is a mistake that many make because they think they’re getting a share in the company rather than the cryptocurrency alone.
In terms of financial data, this will be released depending on the exchanges’ rules with an IPO. For ICOs, all financial data will be available via the whitepaper or the blockchain. Furthermore, decision-making is also very different because we know that CEOs and the board make important decisions when running a business on a day-to-day basis. With a decentralized system for ICO companies, investors will have a material decision-making position.
Elsewhere, other differences include the rules relating to tax. With an IPO company, they’re forced to pay tax while all investors must also pay capital gains tax if their wealth improves as a direct result of their assets. Meanwhile, an ICO doesn’t necessarily cause taxation for the company but the investor will still have to pay capital gains tax. Additionally, IPOs will only ever occur once while ICOs can offer several rounds of financing.
What is a cryptocurrency ICO? Similar to an IPO, a cryptocurrency ICO is an attempt to raise interest and funds for a new virtual currency. With some of the most successful cryptocurrencies launching this way, it’s a good method of generating funds to launch or progress a virtual currency. As this niche gets more popular, we’re only going to see more of these taking place over time!
If you want to learn more check out our Cryptocurrency Secrets Guide in our Resources Section
I hope you enjoyed this post and if you have any questions about Cryptocurrency ICO’s or you just want to leave your own personal experience with Cryptocurrency, leave a comment below. I would love to hear from you!
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8 Comments on “What Is a Cryptocurrency ICO?”
Hi there and thanks for the detailed information. The virtual currency business seems to be getting bigger and bigger. To jump on a train right in the beginning is the golden ticket I guess. I hope to learn about a cryptocurrency once, while still being in the ICO phase and get the chance to invest.
Hi Stefan thank you for dropping by and taking the time to leave a comment.
Cryptocurrency I believe will become mainstream once the Governments around the world find a way to regulate it.
Currently, it’s like the “wild’West” when it comes to Cryptocurrencies!
I’ve been listening to radio hosts talk all about Bitcoin and Bitcoin futures recently. I found this post and was happy to read it. You kept it nice and simple for me. I like how you broke down the confusing vocabulary. So if I were to invest in the ICO period, I would technically be going “long” Bitcoin, correct? And since it’s “initial,” are there options yet in the case that we would like to limit our risk? Thanks again for the great post. Now I can help my parents understand a cryptocurrency ICO.
Hi Neil.. thank you for dropping by and taking the time to comment.
With ICO (if it’s a good ICO) you have a chance at taking the profit when it hits the exchanges OR hold (hodl as it’s called) and this will come down to your trading strategy. For example the recent ICO I participated in I could have taken out my investment x12 when it launched, however my game plan is to HODL (Hold) for 12-18 months because I believe this company has a good future ahead of them.
With regards to limiting your risk.. ONLY INVEST WHAT YOU CAN COMFORTABLY AFFORD TO LOSE. Cryptocurrencies are unregulated and this alone is bringing in a lot of sharks ready to scam people. As I said in the article it’s like the Wild West when it comes to Cryptocurrencies!
Wow, what a fantastic job on explaining this hot topic. Thank you!
I am completely fascinated by cryptocurrency. And as a new currency I can see its viability. I just hope that it does not become another leveraging source for social disaster as capitalism has.
That being said, what would you suggest for a small investor to consider as trying to get into the market?
I am so grateful for this article. It is so interesting to read, informative and to the point. I really appreciated how you took the time to break down all the facets and terms to make it so very understandable. I feel like now I have such a more thorough understanding.
I agree with you that cryptocurrency is not going away. And it will be interesting to continue to watch and learn how it becomes mainstream. What are your thoughts on how it might become mainstream and how it will affect the world?
In peace and gratitude, ariel
Thank you for dropping by and taking the time to leave a comment.. I appreciate your kind words too!
For a small investor I recommend don’t go in blindly, take your time to learn about Cryptocurrencies before investing your hard earned money.
Bitcoin is the buzz word at this moment and this is bringing a lot of sharks into the Crypto arena ready to scam people by linking their scams with Bitcoin. I recently did an article on The Bitcoin Code Scam. This is just one of the hundreds of scams on the internet making innocent people believe these companies will help them grow their money by trading in Bitcoin and give then an amazing daily return using their secret software.. yeah sure!
I do believe Cryptocurrency is the future and the reason why this is not happening fast enough is the fact Governments around the World don’t know how to regulate it (meaning TAX IT!) Having said that for new ICO’s the Goverments are making the companies ask for people details under the KYC (Know Your Customer) and AML (Anti Money Laundering) Rule.
The UK and Europe plan to regulate Bitcoin and other Cryptocurrencies.
So to answer your question about crypto becoming mainstream I don’t believe Bitcoin will become mainstream. I believe it will be one of the newer crypto coins. Will it be good for the world? I do believe YES, it will make the process of moving money much faster and more cost efficient. Anything that takes away the control the big banks have is good in my opinion.
This is a very interesting article about the Cryptocurrency ICO process. I had a clear understanding about what a IPO was, but a little confused about ICO’s. Since there so many electronic transactions going on these days, it makes perfect since to make use of this currency.
The cryptocurrencies had a little rough history, but the Euro also had one too. I think most currencies depending on how it’s backed will have this type of value. There are so many people telling us to invest in Gold or Silver these days since the fluctuation is so high on traditional currencies, but you can’t easily buy things with it.
Hi Tony thank you for dropping by and taking the time to leave a comment.
I am in favor of Cryptocurrencies as it makes transactions easier, faster and without having to pay exorbitant bank fees.
When you compare it with Gold, a tangible asset which can be held and felt, gold historically has always held a value due to the limited supply.
Cryptocurrecy at this moment is very volatile and with no regulations in place, it is like the Wild West.
However when things settle down and the process of buying with cryptocurrency becomes easier, I believe there will be mass adoption and we will have a cashless society. Like it or not it’s coming! 🙂