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What is an Initial Coin Offering (ICO)?

Have you ever seen the term ICO or Initial Coin Offering all over social media or the news and wondered what exactly it was and why people were talking about it? I am here to explain it all!

In my videos, I am compiling my evaluations of a ton of startups and their tokens to give you the low-down so that you can decide whether or not you want to invest in ICO’s on the market. Don’t forget to check out my YouTube channel!

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Many years have gone by with notable companies declaring their intention to issue stock in their company to the public; companies like Twitter, Snapchat, Alibaba, Facebook, and more have created huge buzz with the news that they would be issuing an Initial Public Offering (IPO). Many people use these companies’ products every day, and were chomping at the bit to get a piece of them in the open market (literally) by buying their stock. Millions and millions of dollars get pumped into these IPO’s every year, and there are rumors that Spotify is coming to market with an IPO in 2018 that will be accompanied by much fanfare. However, there is a new offering in town that has usurped the mass media attention: Initial Coin Offerings (ICO).

The term Initial Coin Offering (ICO) is a play on the term Initial Public Offering (IPO), and the concepts do not differ very much between the two. An ICO is simply an offering of digital coins/tokens (think Bitcoin, Ether, etc.) that a company’s blockchain app uses as an investment or up-front way to raise capital. These tokens are not a share in their company, nor is there equity being exchanged, but rather, ICO’s give individuals the chance to buy into a company’s idea or application through coins/tokens. These coins/tokens are often used as part of the application itself, making mass adoption of the application in the future a likely avenue for the tokens to increase in value. Much like with stocks in an IPO, investors investing in an ICO are betting that a company’s product will grow and become wildly popular in the future. However, unlike stocks, rather than using traditional metrics like revenues, profits and debts, a coin/token’s value is determined by metrics like adoption, supply, demand and the application’s use case.

You will often see startups announcing ICO’s or token sales on social media, and it seems that a new one occurs almost every day (please not I use the term token and coin interchangeably)! However, now that you know what they are, you may be wondering how these sales work. There are two most common ways participate in an ICO or token sale; pre-signing or open market. In a pre-sign token sale, investors are able to sign up on the company’s website to state their interest in investing. Duing this sign up process, potential investors are required to fulfill minimum “know-your-customer” requirements for their country, which helps establish their identity. From there, the company issues tokens to the individuals for a set price which can be paid in fiat currency or other cryptocurrency. The tokens/coins that are purchased are deposited into a digital wallet owned by the investor on the company’s platform. Blockstack is a company that has used this type of process recently. On the other side, with an open market sale, companies state a date and time that tokens go for sale on their website and investors can purchase those tokens with fiat currency or other cryptocurrency like Ether, Bitcoin, and more. These types of sales can start and end within 90 seconds for some of the most hyped startups, with their full volume of tokens for sale being claimed in that short time window! Just like the above example, tokens purchased in open market sales are deposited into digital wallets on the company’s platform.

There is one missing piece to this whole puzzle, what the heck do those tokens or coins do?! I have you covered. In the world of blockchain and cryptocurrency, the coins or tokens in a company’s app often serve as a form of incentive structure to use the application. They are the “fuel” that drives the use of the product the startup is offering. For example, the Basic Attention Token (BAT) offered by Brave serves as a form of payment on their custom web browser that internet users can pay to their favorite content creators on the web (YouTubers, bloggers, etc.) and in return, the users get an ad-free internet experience where they pay for exactly what they want to see. These BAT tokens can be purchased or earned for watching ads, then reinvested into the system as users pay internet content creators. Are you seeing the theme? It’s like a miniature economy inside a web browser! These tokens accrue in value with the more people that use them, and the amount of supply there is relative to that demand. This is just one of many examples of how cryptocurrency fuels applications, and I will be doing in-depth evaluations of tons of cryptocurrencies and the applications and startups behind them in the coming weeks, so stay tuned!

 

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