What is an ICO? Technology that is Revolutionizing Business Finance
We have been talking about ICOs for years, but it has not been until recently that they have been widely adopted. ICOs are just another aspect of the crypto currency market, but yet a very important one, 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 possible way.
But what is an ICO?
ICO is an acronym meaning Initial Coin Offering, that is, initial money supply. The acronym ICO is quite similar to the IPO, the term that is used when a company goes public and wants to offer shares to potential investors in exchange for money.
In the case of an ICO, what is intended to be financed is the birth of a new crypto currency, in the style of Bitcoin or Ethereum. We have already spoken in previous occasions of these crypto currencies. These are virtual tokens that are scarce, protected by cryptography, which have a value due to their scarcity and their demand. These virtual currencies serve both to make payments in a very economic way to store value, as there are markets where they are exchanged for real money.
Cryptocurrencies are created over time by a process that is called “mining.” The “miners” make available to the project computational power, which allows the system to function and receive prizes: both “mined” coins that appear spontaneously and randomly as by the commissions they receive when verifying commercial transactions that occur between users of the currency.
When someone decides to create a new crypto currency first, it is implemented through software. This software is made available to the community so that the miners that other miners appear.
The whole process has a cost and one way of financing the project is an ICO. Developers are pre-mined behind closed doors and offer the new virtual currency in exchange for other currencies that already circulate, such as Bitcoin, and 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 any intermediaries.
Financing a blockchain-based project
It should be noted that an ICO is not only used to finance the deployment of a crypto currency. The blockchain is a chain of information protected by cryptography and shared by the whole community that allows it to register the economic transactions within the crypto currency.
Although initially the blockchain was only the technology behind the new digital coins, it can be used for multiple tasks. For example, it is used to perform cloud computing without loss of information, to manage copyright, to have an information-repository, and so on. A blockchain allows you to store and modify data in a secure and verifiable way and therefore many businesses are well adapted to this technology.
Whenever someone decides to use blockchain technology for special use, there must be an associated currency (and it is often 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. Tokens can be used within the project to make payments for specific services.
In the end, both cases of an ICO (financing a crypto currency 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, since although often the crypto currencies are seen as a fad, blockchain is developing as a technology very useful by multiple industries.
What is an ICO used for?
It is clear that the objective of the creator of the token when performing an ICO is to raise money. A successful example is Ethereum which, before launching, managed to raise 18 million dollars. Of course it was an initial injection of money that came in handy at the time of starting the project.
On the other hand are those who participate economically in the ICO. What the participants want is, of course, to make a profit. Crypto currencies usually go up fast in price (here we do not go into valuation if there is a bubble of crypto currencies), and those among the initial participants of a project have greater possibilities of high profits.
What are the advantages of an ICO?
Having the possibility of launching an ICO to fund a project has some advantages. The clearest one is that the authors of the crypto currency do not have to obtain financing by the habitual circuit (banks or investors in venture capital). This makes it possible to achieve more advantageous conditions.
For individual investors it also has an advantage: to be able to finance very innovative companies directly. The usual financing channel for projects is usually not available to private investors or only for very large capital. Of course the reason for this is that there is usually a very high associated risk that banks and venture capital funds do not normally market to retailers but to qualified investors (for both 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 not worth anything. It is the typical risk that is run when investing in a business project, so nothing new under the sun.
However in ICOs there are other problems. For example, the security of the crypto currency is not correct and someone manages to steal all the money. The most recent case is that of DAO, where more than $150 million were stolen, money that investors lost. This risk is not negligible.
Another risk is that these type of operations are not regulated, and are outside the conventional financial system. This does not appeal to governments for several reasons: on the one hand because they lose control of money and taxes; on the other, because these ICOs can be used for criminal activities (financing terrorism, for example). So any day we could see how financing an ICO may be illegal, and in fact, China has already taken that step). That wasn’t so bad, right?