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What is an ICO? An investment guide for beginners

By Amy Luong
June 23, 2021

ICO (Initial Coin Offering) is a fundraising event in the Blockchain industry through the offering of tokens. If you are unfamiliar with this concept, just keep in mind that NEO and ETH are two of the most successful ICO projects till present. In this article, Tokenize Xchange will help you understand how ICO investment works, the risks, and the benefits of ICO investors

Initial coin offering

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What is ICO?

ICO (Initial Coin Offering) or cryptocurrency crowdfund – is a fundraising method in the cryptocurrency and Blockchain industry through the offering of tokens.

During the ICO for cryptocurrency, the company would issue a certain number of Tokens to offer to investors, in exchange for Bitcoin, Ethereum, some other Altcoins, or cash. The firm would receive capital to develop their projects, while investors would receive issued Tokens and have full ownership of their tokens. 

These tokens can be used as utility tokens in using services or products of the offering entrepreneur or present as a share in the project. Investors who participated in an ICO investment will not hold ownership of the company.

ICO investment

The process of ICO

Some ICO investors are successful and become millionaires while others have failed. If you are interested in this type of cryptocurrency investment method, let’s move to the process of an ICO to find out how it works. The basic development process of ICO project includes 10 stages:

  • ICO planning
  • Whitepaper creation
  • ICO launch and ICO website development
  • ICO marketing
  • ICO token development
  • Smart contract development
  • E-wallet development
  • Post ICO service
  • Cryptocurrency listing on exchanges

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ICO vs IPO: What is the difference?

Though ICO (Initial coin offering) and IPO (Initial public offering) share some similarities, they are distinguished by their nature. As mentioned above, ICO is the fundraising activity through the creation of cryptocurrency on a blockchain which is distributed over a public ledger. An IPO, on the other hand, is the distribution of stocks to the public under the management of an investment bank

Have a look at this infographic below for some differences between IPO and ICO: 

ICO and IPO

ICO risks to investors

All investments contain risks and opportunities. To make wise decisions, all investors need to understand clearly the risks they may get in ICO investing. Learning about the opportunities ICOs offer and the possible risks will help you make a good decision.

ICO project scams

Investors may access the limited transparency toward project legitimacy and meet difficulties to grasp the bigger picture of the ICO before investing. Hence, they may suffer from scams or pump and dump schemes after buying tokens. The token could be purely speculative and experience strong fluctuations. In the worst situation, the project may become a failure. 

ICO scam alerts

Risk of default

ICOs have not been strictly regulated by governments, so any company or organization with the ability to create a digital coin can also make an investment call through ICO. The lack of control has created a digital security vulnerability for many attackers to create coins with no value, which cannot be developed to scam investors. 

No regulatory protection 

Since the ICO does not base on any legal framework, investors will not be protected when a scam occurs but must be responsible for their own decision. While many countries support ICOs like the USA, UK, Switzerland, Singapore, Lithuania, Australia, Russia, others including China and South Korea officially ban ICOs, denouncing them as the rival for financial stability. In early 2018, Facebook, Twitter, and Google all banned ICO advertisements.

Benefits for ICO investors

ICO is a major opportunity for entrepreneurs looking to start or grow their businesses. Also, it provides a chance for new investors since it is quite simple to invest in an ICO. Below are some benefits of ICO investment. 

ICO cryptocurrency

1. Potential Investment

An ICO is an opportunity to own a new cryptocurrency at a low cost with the hope of getting a good return on their investment. Early investors can gain access and reach higher liquidity in the early stages. Early ICO investment also boosts the potential for rapid capital growth. 

2. High liquidity

The token has a value upon its crowdsales in an ICO and its value freely floats in a global 24/7 marketplace. 

In an IPO project, investors may have to wait for a decade until the stock becomes liquidated. However, ICO investment allows you to sell your tokens in 10 minutes! Though ICO developers might have ways to prevent short-term arbitrage, such as lock-up the digital coin, this incredible liquidity is such an advantage of Initial coin offerings. 

3. No intermediary

Once the ICO project is launched, the token can be sold on the cryptocurrency market where buyers can purchase tokens immediately without an intermediary. That makes ICO a simple and convenient method for the majority of investors.

4. Portfolio Diversification: 

ICO investing is an alternative method along with cryptocurrency trading to diversify your portfolio, providing a hedge against political and economic crises without relying on fiat currencies. 

5. No geographic boundary

Unlike IPOs, ICO launches internationally over the Internet, with digital currency transferring from over the world. Technology-driven companies can raise crowdfunds through ICOs from wherever they are located and from global investors, which removes the geographic barriers for cryptocurrency investment. In fact, Ethereum, one of the most successful ICO projects, does not exist in any physical location. 

6. ICO additional advantages

ICO projects provide you with some additional benefits for investors such as the ability to access to products and services of the projects or the company. 

ICO investment can be a great opportunity or a huge scam, it depends on the investors themselves. In the end, it is the investor who has to do his own research to figure out whether the ICO project is legitimate or not. Keep avoiding fishy projects with numerous red flags and following Tokenize Blog for more investment guides!

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