Last editedSept 20213 min read
If you’re on the hunt for new investment opportunities, you might be considering cryptocurrency trading. One way to get in on the ground floor is with an initial coin offering, or IPO. How does initial coin offering work, and is there really potential for profit? Keep reading in our guide to initial coin offering, explained.
What does initial coin offering mean?
An ICO is similar to an IPO, or initial public offering, but it applies to purchasing coins in a new cryptocurrency rather than buying shares in a company. As with an IPO, there’s some level of risk involved. Not all ventures will turn into a Bitcoin - while some cryptocurrencies take flight after their ICO, others tank in value.
When you get involved with an initial coin offering, you purchase coins or blockchain tokens. These are intangible assets entitling the coin holder to certain rights. As with an IPO, tokens are released for the first time to the public in an ICO. The purpose of this release is to generate funding for the cryptocurrency. Once you’ve purchased coins or tokens during this initial sale, you’re then free to trade them on cryptocurrency exchanges.
Initial coin offering explained
One factor that makes initial coin offerings stand apart from IPOs is that they are regulated differently in various countries. A company might issue tokens that are only available to buyers from a certain region, for example. In Australia, ICOs can be classified as either share offers or managed investment schemes. The rules will depend on this classification, so it’s important to read up on the latest financial regulations before you make a purchase.
How does initial coin offering work?
Here are a few reasons why a company will start selling new cryptocurrency coins to the public:
To put the new coins into circulation
To ensure the new coins have a wide base of traders
After the initial batch of coins has been sold, the traders are free to buy and sell the tokens on public security exchanges, which increases circulation and (ideally) value.
In Australia, the very first ICO was Power Ledger with its POWR tokens. When first put on sale, the ICO raised AU$34 million from a mixture of Bitcoin, Ether, Litecoin, and fiat currency.
There aren’t any restrictions on who can use an initial coin offering to raise funds. A partnership, individual, or company can take advantage of blockchain technology to issue their own new tokens.
How to buy initial coin offering
If you’re interested in getting involved, there are a few factors to consider before making your first purchase. Here are a few tips to keep in mind when looking at how to buy initial coin offering:
Investigate the team behind the coin: Anyone can issue coins, so you need to be sure that it’s a legitimate venture with solid backing from an experienced team. Anonymous ICOs should generally be avoided.
Investigate the research behind the coin: Any legitimate ICO should offer the same level of research-backed evidence that you’d expect from an IPO. This will include a whitepaper covering all the technology and intended function of the new coin. What is the long-term vision for this venture?
Read terms and conditions carefully: All ICOs should also include smart contracts containing detailed terms and conditions for investors. What will your rights be regarding refunds, token ownership, and shares in any profits?
Consider supply and demand: How many tokens or coins are being issued in this initial coin offering? How limited are the supplies, compared to demand for them? Weighing supply and demand against current economic conditions gives you an idea of whether the price seems right.
Once you’ve done this preliminary research and are satisfied that the initial coin offering seems like a solid investment, it’s time to make your purchase. There are a number of initial coin offering platforms to choose from. These are designed to connect companies with public buyers, facilitating sales using the blockchain. Ether, which operates using the Ethereum network, is a popular initial coin offering platform.
The best cryptocurrencies have years of research and development along with an experienced team backing them before they ever make it to the ICO stage. Be sure to check dates, prices, and wallet requirements before making your investment.
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