You have probably heard of so-called initial coin offerings in the financial news in the past few months. Initial coin offerings, commonly referred to as ICOs, are a new form of startup financing that involves the issuance of a new cryptocurrency.
In this brief guide, you will discover what initial coin offerings are, how they work, and whether you should consider investing in them or not.
An initial coin offering is an innovative new form of funding.
What is an ICO?
An initial coin offering, also known as token sale, crowdsale, token generation event or simply ICO, is an innovative new form of funding that involves the sale of a newly-issued digital token to early backers of a project. This new type of funding comes from the blockchain startup space but has now also been adopted by more established companies such as Telegram, Kodak, and Overstock.
The way it works is that investors purchase the new digital token using the digital currencies bitcoin or ethereum during the token sale period. Once the crowdsale is complete, investors receive their newly issued tokens and can then start trading them on designated digital currency exchanges.
Investors are, therefore, investing in projects that they believe will succeed, which should result in an increase in value of the new digital token they hold. In that sense, ICOs are very similar to stock IPOs but with the main difference being that they are (still) largely unregulated and that the token usually does not constitute a share in the company. The token’s value is thus only indirectly linked to the company’s success and provides no claim on its assets.
While some newly-issued digital tokens have multiplied in value over the course of only a few months, the reality is that cryptocurrency ICOs are an extremely risky asset class that can lead to a complete loss of invested funds.
If you are going to invest in cryptocurrencies, you may be better off adding some of the more established digital currencies, such as bitcoin, litecoin, and ripple, to your portfolio instead of investing in extremely high-risk tokens that may or may not perform.
However, even then, it is best to only add a small holding of cryptocurrencies to your overall investment portfolio, which should ideally be composed of a diversified basket of assets such as stock, bonds and property.
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