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A Quick Guide on Initial Coin Offering

ICOs

November 2, 2020 | 

JOHN K MWANIKI |  0 Comments| 

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Raising money for a project is one of the leading startup concerns. Looking for private investors takes time and comes with unassured success. Initial Coin Offering (ICO) is changing this. 

ICO is providing an easier way for startups to raise capital. Here are the ICO basics to know;

What is an ICO?

ICO is equal to the traditional Initial Public Offering (IPO). It is where a company looking to raise funds creates a service or app for prospective investors. 

The ICOs involve cryptocurrencies. The organization uses the blockchain platform to create the token. The investors then buy it using either Bitcoin or Ethereum

Benefits of ICO

ICOs have been successful due to several benefits. Some of the quarters have hailed it the disrupter of venture capitalism

The fundraising methods are beneficial to both the fintech companies and the investors.

  • Benefits to the Fintech companies 

For a long time, fintech firms were all about venture capital. They would pitch to willing investors who would put their money in projects for a stake. The companies are of late embracing the ICOs. 

The main reason for preferring the ICO is the more expansive reach. The traditional fundraising options are limiting potential investors. ICOs are limitless. Access to a broader range of investors means better prospects.

Another benefit of the ICOs to the firms is the speed of set up. The decentralized cryptocurrencies are not regulated. They don't need a lot of documentation before setting up. Neither do they have to follow a lengthy bureaucratic process like the IPOs. 

ICOs are also great for marketing. Ever since the launch, cryptocurrency has changed the trader's perception of alternative investments. Digital currencies have shown there is more to money than fiat currencies. For that, most companies position themselves as the leaders in crypto. They, in the process, attract the investors.

  • Benefits to the Investors 

Like fintech firms, investors have also embraced ICOs. They are willing to risk their money in the different ICO projects. This is even after warnings from the regulators

One of the benefits that come with ICOs is the lack of restrictions. IPOs, in most cases, are for institutional investors. It is only later on that other private investors can gain access. In such cases, it's when the shares fail to hit the target.

IPOs also come with buying thresholds to meet. Meaning they are perfect for affluent investors. ICOs don't provide for any limitations. Anyone can take part as long as they have access. 

ICOs offer investors an opportunity to make profits. Even though there is the risk of losses, several ICOs have made it big. For successful ones, investors made such huge profits. For example, early investors in Ethereum have made exceptional profits.

ICOs also offers the best opportunity for investment diversification. Most traditional investments are expensive; thus, one can only invest in a few options. ICO tokens are easy to buy and more affordable hence one can invest in several. They also don't have any cross-border restrictions. One can invest in a project from any country. All they need is access to an internet connection.

What are the ICO Risks? 

Even though ICOs are popular, the associated risks stand out. The investors getting into the projects already understand the risks. 

Top of the risks is the lack of regulations. The decentralized cryptocurrencies come without a central authority control. They operate on the mercies of the developers and market demands. The lack of regulation means one does not know what exactly is an ICO. Anyone can start a project without quality provisions. 

The lack of regulation leads to the second concern, lack of investor protection. Investing needs peace of mind and assured returns. Both of these are not available with the ICOs. Already several investors have lost money in ICOs. Some projects offered tokens without ever picking up. In such cases, investors don't have any fighting chance.

Cryptocurrencies are volatile. It means one is never too sure about the value of their investment. The volatility works such that the value can change within seconds. A steep decline in value means enormous losses to the investors.

The ICOs are online-based, thus open to hacks and other online frauds. Several projects before have fallen to online theft. The investor must use extra security to keep safe. 

Also, the ICOs don't provide enough documentation. Unlike IPOs that need updated records, there is none for the ICOs. The lack of reference means it's harder to make informed investment decisions. It's more like an investment based on guesswork. Such increases the possibility of losses for the investors.

What is the Future of ICOs?

Even with the several risks, the future of ICO is great. The funding method is popular with both investors and firms, making it a big hit. Its popularity means it will be phasing out IPOs in the future.

The only concern in the future is the regulations. With the ICOs become mainstream, regulation is inevitable. There is a need to ensure investor safety.

For now, several countries have come up with rules controlling the ICO operations. They seek organizations to provide documentation before launching a token. They also have to seek authorization from relevant regulatory authorities.

Still, not all organizations are willing to embrace the regulations. This has seen some of them claim they are not securities. They change the form of the tokens to be more of cryptocurrencies than securities.

The issue has been running for some time, even leading to court cases. The courts ruled that ICOs are securities. For that, they follow the Securities Act 1993.

The future of ICO is more mainstream and regulated.

Bottom Line

ICOs have become the ideal way for companies to raise capital. It comes with ease of launch and access to several investors. It is also helpful to investors as it allows for ease of diversification.

Still, it comes with several risks like the possibility of fraud. It also does not offer investor protection and volatile.

The ICOs still are becoming more mainstream. They are securities, which means more regulations will soon be in place. It remains the future of capital raising.

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