Cryptocurrency is currently a hot topic in the news recently, thanks to the rise and popularity of Bitcoin. But how did Bitcoin get to this point? To understand this, you not only need to understand cryptocurrencies, but something called an initial coin offering (ICO).
How Initial Coin Offerings (ICOs) Work
Just like any business venture, a cryptocurrency needs to have funds raised in order for the business to take off. However, raising these funds using banks or venture capitalists is usually a highly regulated and time-consuming process. In order to bypass this hassle, the startup creating the cryptocurrency instead gives a percentage of the currency to the initial backers in exchange for either traditional currency, Bitcoin, or some other cryptocurrency. Cryptocurrency is also referred to as, “Tokens.” Let’s look at how this process works:
Step 1: Create A Plan
Before a startup can solicit money from investors, it usually drafts a whitepaper stating the amount of money that the startup needs to raise, how much of the cryptocurrency will be kept by the startup’s founders, what type of legal tender the startup is accepting from investors, and how long the fundraising campaign will last.
Step 2: Raise the Money in the Allotted Timeframe (Or Not)
At this point, the startup tries to raise the money needed within the timeframe stated in the whitepaper. If it doesn’t, all the money that was raised is returned to investors, and the cryptocurrency ends its run. If the money needed is raised by the time stated, then the invested funds are used to complete the project.
Examples of ICOs
There are hundreds of companies utilizing blockchain technology in hopes of creating the next big thing in the cryptocurrency space. Here are some examples of innovative companies utilizing blockchain technology to successfully raise needed funds:
One of the most popular and successful examples is Ethereum, a company that lets users use smart contracts and Distributed Applications without them being centralized, made possible with blockchain technology. The unique thing about Ethereum is because it’s cryptocurrency tokens, known as Ether, is used both as a currency and to run Ethereum applications. Ethereum’s ICO investors traded Bitcoin for Ether, and the company successfully raised $18 million during its ICO run.
Javvy is a company that provides users with an extremely secure, non-web based platform for trading in cryptocurrencies, as well as a digital wallet for said currencies.
Circle is innovating by letting users text each others currency via text, with no fees.
How to Invest in an ICO
Remember that ICOs combine elements of IPOs, as well as crowdfunding. Those interested in investing in an ICO can trade Bitcoin, Ether, other cryptocurrencies, or FIAT currency (credit/debit cards and bank transfers) to get whatever ICO tokens they are looking to invest in. Once you have a cryptocurrency wallet, such as MyEtherWallet, Parity, or Blockchain.info, you can then transfer currency to the ICO.
Find the official webpage of the ICO you are interested in, and make sure it’s authentic. You can purchase the necessary base cryptocurrencies on Coinbase, and then transfer it to your wallet. From there, register on the ICO’s site, entering the public address of your cryptocurrency wallet to the site. You will receive launch day instructions, which will allow you to trade Bitcoin, Ether, or whichever other currency is being accepted for the ICO’s cryptocurrency.
Important Things to Remember
It is important to keep in mind that investing in ICOs is just like any other investment: There are risks. Just as you know that every penny stock isn’t going to make you a millionaire, know that many ICOs fail, and some are outright scams. Understanding the risks, as well as doing your research (Including reading the ICO’s whitepaper) can be a way to make a more informed decision about your ICO investing. Another thing to note is that your public wallet address, private key and wallet password are different. Just like you would never give out your PIN number or account passwords, you should never give out your private key or wallet password.