Initial Coin Offerings (ICO) | What are they, how do they work and their advantages.

It is becoming common to hear terms like blockchain, ICO (initial coin offerings), IDO, cryptocurrency, Bitcoin, Ethereum, etc… But do we really know what they are? Today I would like to make my contribution so that the ICO (initial coin offerings) concept, specifically, is easier to understand. I hope it will help you.

WHAT IS AN ICO (initial coin offerings) OF A CRYPTOCURRENCY OR TOKEN?

An ICO is an initial coin offering, it could be compared to a public offering for sale, in which a company goes public to offer its shares to potential investors in exchange for money. At the same time, an ICO is not only used to finance a new cryptocurrency, but it is also useful to finance the deployment of a blockchain technology network, however, in this document we are going to focus on cryptocurrency ICOs.

The ICO is a financing instrument to carry out a business project, in which a cryptocurrency is used as an asset. Cryptocurrencies are scarce virtual tokens, protected by a cryptographic system, in which the value of the token lies in its scarcity and demand, that is, like any other currency. Like any other currency, they are used to make payments and store value since there are markets where they are exchanged for “traditional” currency. There are specialized web pages where you can find information about future releases.

In summary:

 An initial coin offering is a funding mechanism by which cryptocurrencies are obtained or raised; which allows the launching of a new service or a new currency. So that the investor delivers the cryptocurrencies and receives a token from the company in exchange. 

There is no way to create currency, but you have to “mine” it. There are two types of mining:

Proof of Work: the process consists of the computers of the blockchain technology network used in cryptocurrency, by solving complex mathematical problems, they get the cryptocurrency as a ‘’reward’’. This is the case with Bitcoin or Litecoin.

Proof of Stake: It is a model in which the owners of the cryptocurrency are progressively rewarded with new tokens of the same type. With this process, the holders of the largest amount of currency are more likely to receive and thereby increase their amount of cryptocurrency.

HOW DOES AN ICO (initial coin offerings) WORK?

Initial coin offering is a type of cryptocurrency financing. In an ICO, cryptocurrencies are sold in the form of Tokens to speculators or investors in exchange for traditional money or other cryptocurrencies such as Bitcoin or Ethereum. Remember that the investor always has to do a detailed investigation of the ICO before making an investment (you can search it on the web for launches and opportunities).

In short, an ICO is a novel method that allows obtaining funds for new projects from those who want to participate in the project, those cryptocurrencies obtained can be freely negotiated.

But first, it is important to know the risks that this entails since it is something very new and has a very lax or non-existent regulation, for which many cases of fraud have been detected. Keep in mind that money is being contributed to a recently created project, and recovering the money will depend on the viability of the said project, like any investment, it has its risk, but on new projects, the risk is much greater.

CHARACTERISTICS OF AN ICO (initial coin offerings)

Some of the characteristics of ICOs are:

  • New companies (startups) use it to raise funds, offering and promoting their products and services.
  • Depending on their purpose, ICOs can be similar to the shares of a company, allowing the participation of third parties.
  • They avoid the participation of intermediaries (banks or brokers).
  • They allow to form or expand the capital of a company through the acquisition of cryptocurrencies.

ADVANTAGES OF AN INITIAL COIN OFFERING (ICO)

  • The ICO allows companies to collect funds, without limitations of space and jurisdiction.
  • The investor will receive a token that can give him a lot of stability, instead of the volatility of the value of cryptocurrencies.
  • They are easy mechanisms to design and launch on the market, with online services.
  • The company feeds on the enthusiasm of investors, who expect good profits in exchange.

THE DOWNSIDE OF ICOS

As always happens, all that glitters is not gold. In the case of ICOs, problems are also being detected, and with the investment madness that has been unleashed today, you have to be very careful.

The main problem with investing in an ICO is that they are easy to ‘fake’. Practically anyone can invent a project, or a powerful team, publicize it and receive the investment, and, later, keep all the proceeds. This is what is known in the world as a ‘scam’.

Another problem that exists is the counterfeiting of ICOs. There are clever people who have created copies of official ICO websites, changing only one letter, and have managed to fool many people, who transferred money to their accounts thinking that they were participating in the official ICO.

HOW TO PROTECT YOURSELF WHILE PARTICIPATING IN AN ICO?

The best option is to be up to date and follow up on an ICO that interests us long before it begins. We see their website and add it to our favorites, we enter their preferred communication channels (they usually use Telegram) and we keep up to date with all the progress.

Another option is to use websites that already do a prior review of ICOs, filtering out those that are most likely to be scams, and making sure that the information they show is official.

CONCLUSION ON ICO (initial coin offerings)

To conclude, for all that has been said, you have to be careful with these projects since, due to their characteristics and their ‘’ease’’ of assembly, many (if not most) are not profitable, my recommendation for the investor is that they Read the ‘’ white paper’’ of companies offering ICO, it explains the intrinsic characteristics of the project, as well as its creators, the expectations they have of demand, the target audience they have, etc…

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