What is an ICO and How Does It Work?

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Cryptocurrency seems to be the new buzzword over the last few years.

We have all heard of things such as Bitcoin and Blockchain but not that many people know exactly what these things are. This is where we come in.

Have you ever heard of the term ICO? If you have even a passing interest in cryptocurrencies then you have probably come across the term at some point. The chances are you still don’t know what it means even after reading a few articles. Don’t worry because it can be a very confusing subject and a lot of industry professionals aren’t 100% what it means.

In this blog, we are going to cover all the basics that you need to know about ICO’s. From what it actually means, how it works and also what the advantages of an ICO can be for certain companies and businesses.

Ready?

initial coin offering and cryptocurrency explained

ICO meaning – what is it?

So, you have probably heard of an IPO or Initial Public Offering. This is when companies allow the public to buy a stake in their business. For a price, they get equity in that company and it allows the business to raise millions in one day.

An ICO is a little different. An ICO stands for Initial Coin Offering. It is when a company releases their own cryptocurrency. This sounds a bit far-fetched but there are many companies doing this and there are a lot of niche currencies that are specific to certain industries. Not everything has to be about Bitcoin!

The important difference between an ICO and an IPO is that when investors buy this new currency they don’t actually get a stake in the company itself. With an IPO you get a share of the company whereas with an ICO you get a new cryptocurrency – so how do you actually make money from this?

How does an ICO work?

There are many success stories of ICO’s but let’s use an example to show you how it works.

So, your company wants to expand and experience growth. You produce what is called a white paper and this will detail everything about the company from the staff, project, costs and future growth estimates as well as the new cryptocurrency you are introducing. You agree to accept other cryptocurrencies that are already in circulation. If someone wants a taste of your new currency they need to send you one that exists.

How does this make money for people?

Well, in return for some bitcoin or another established cryptocurrency, they receive a certain amount of your new currency. The more other people do this the more your new currency is going to rise in value. This means that the investors who have given you bitcoin for example in exchange for the new currency can eventually sell on the new currency for a lot more money than they initially paid.

You get a significant capital infusion which can help facilitate and accelerate your growth while they get a new cryptocurrency that they can sell on for a profit.

What are the advantages of an ICO?

Hopefully, all that makes sense! The question needs to be asked though – what are the advantages of this approach rather than an IPO?

The great thing about an ICO is that there isn’t a lot of regulation with it. This massively cuts down on paperwork and red tape that you would normally have to go through with an IPO. Obviously, the big advantage here is that you also don’t lose any share of your company either. You get a massive capital boost and you keep complete ownership of your business.

ICO’s also have the advantage of allowing investors to get in early when it comes to a new cryptocurrency. Most of us only hear about these new currencies after they have been in circulation for a while and the value has already skyrocketed whereas with this approach an investor can get in right at the start and make a great ROI (return on investment) as a result.

Will ICO’s change the whole financial system?

There are some precautions to take when it comes to ICO’s and many of experts within the financial system advise to exercise caution.

That being said, the rise in ICOs and the multitude of new cryptocurrencies that are hitting the market has the potential to radically change the financial system itself and how we do business.

With more and more companies taking this approach expect to hear a lot more about ICO’s in the near future. As a method of raising capital without forfeiting a share of the company and doing this in a quick manner they are a great option. They aren’t perfect and there are some risks however a significant number of new businesses are seeing the benefits ICO’s will become much more popular in years to come.

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