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What the Heck is an ICO?

Webster’s dictionary has added it to its ever-growing list of new entries, but just what is an ICO?

ICO stands for Initial Coin Offering, and at its core it’s a standard form of cryptocurrency transaction. That means that it’s a way of trading digital currency. With an initial coin offering, existing cryptocurrency that is held (Ethereum, for example) is exchanged for a new type of token that hasn’t already been traded as a cryptocurrency. In part, the idea is that increased interest generated through an ICO will boost the value of the new token, resulting in a range of new cryptocurrencies to rival big names such as Bitcoin.

In fact, Ethereum and Ripple — two of the most valuable cryptocurrencies today — both started life as ICOs. For traders, ICOs are a little like buying shares in a small, relatively unknown company; it’s a risky move that comes with zero initial benefit, but holds the potential to become a valuable investment.

ICOs and fundraising

However, there’s another motivator behind ICOs: fundraising. In fact, modern startups are today beginning to use ICOs in much the same way as they’d use an initial public offering (IPO) of stock: to raise money. This is a process that has quickly transitioned from finance into practically every other sector. Of course, infrastructure, trading, and payments continue to dominate the ICO world, but it’s also expanded into gaming & VR, advertising, recruitment, art & music, and real estate. Even photography giant Kodak now has its own cryptocurrency, Kodakcoin, while celebrities such as boxer Floyd Mayweather, and socialite and heiress Paris Hilton have been busy advertising and promoting continued ICO activity.

However, it’s in terms of fundraising that the investment risks of ICOs become even more apparent. Unlike IPOs which offer part ownership of a business, or voting rights in a company — some sort of guaranteed benefit for the investor — ICOs do not. Despite this, businesses have raised more than $4 billion since initial coin offerings became a common and popular fundraising method back in 2017.

Risks & rewards

Of course,it’s easy to see why startups today would utilise ICOs. The first business to launch an ICO, asset platform Omni Layer, raised 5000 Bitcoins; valued at $500,000 at the time, but worth more than $50 million today. Similarly, 168,732 Ethereum coins were raised by social media platform Kik; also valued at around $50 million. However, it appears that there are not only risks for investors but for businesses, too. Reports suggest that an estimated 10 percent of the $4 billion raised through the first year of initial coin offerings never made it to the fundraising business, having been stolen through hacking activity, or lost through unclear regulation of ICOs. It's a topic which has fast become the subject of one of the most heated and controversial discussions within the cryptocurrency industry.

Whether or not ICOs continue to hold their position as one of the most popular forms of new business funding — a contemporary alternative to startup loans and angel investments, for example — remains to be seen. This is especially true considering that, after months of controversy, ICOs have officially been classed as investment contracts under the Securities Act 1933 in the United States. This means that strict regulation is on the way for a form of trading and investment that has, until now, been unregulated. Despite a somewhat unclear future, there is an ever-increasing number of digital tools available to facilitate continued investment, including trend analysis tools, real time market value data, and movement graphs, all designed to help decision makers invest in new cryptocurrency, and new business.

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