A person who is not accustomed or used to the terminologies of crypto industry, it is difficult to conceive the idea of initial coin offering or why the tokens are generated and how to assess an initial Coin offering. For a cryptogeek it is quite simple, for him an ICO is a tool that is used to trade future crypto coins which are exchanged for cryptocurrencies having instant or liquid value. This definition may be simple for a person who deals in all sorts of cryptocurrencies and has undergone various ICOs but when talking about a layman who has no sound knowledge of crypto, it may get complicated.
For your ease of understanding we have devised a simple example from everyday life which will be quiet helpful for you if you want to understand the basic principle of initial coin offering.
Example From Everyday life
Imagine you want to start a business of your own, you have selected the appropriate location for it, and you’ve also planned the interior and exterior design with the sort of items you are going to sale.
But, There’s one most important thing remaining …..
Without a handsome amount you cannot initiate your business, You must rent or purchase the place you have chosen, stock it with the items you want to sale and also hire some staff to tackle it the way you have devised in your mind.
Let us assume that you are an innovative person and you don’t want to get a loan from any one, you just want to initiate your own sum. For that purpose you produce your own branded product with some specific name say for example “BIT”. But you only generate it in a limited quantity of 1,000 pieces. Let us call each piece a currency, and customer won’t be able to buy that currency until they acquire them using special tokens that you’ll release gradually over the specific period of time following your business launch date.
If demand for BIT is high enough and if you succeed in making your buyers believe that its demand will continue to grow, that will automatically push up the price of the tokens generated in the future. These tokens would obviously sell for large sums and as a result you’ll raise enough money to launch your business.
You can make it further simple to say that first you offered shares for a company which you have not yet launched but you had developed a significant trust so public bought that share for the sake of investment. That was an Initial Public Offering from your side.
How To Apply The Same Principle To ICO?
The principle elaborated in the above example, is also behind an ICO. The same way you offered the public initial shares of your company, an ICO gives public the right to buy a product which exists in a limited quantity. The company offering that product has an option to sell its rights for a higher price.
The beauty of the above process and the thing which differentiates it from the prior IPO example is that it is supported by blockchain technology. This technology guarantees the authenticity of the tokens offered. In short ICO is a whole new way for businesses to raise money. According to the latest ICO news update, it has already been used to generate approximately 2 billion dollars.
How is ICO Risky?
Well, we have full trust on the blockchain technology but we have no issue in admitting that it can too be risky as compared to the Initial Public Offering. Let us see how?
First of all the most satisfactory thing about the IPOs is that they are well regulated. Companies which make such offers are lawfully bound to reveal all sorts of information about themselves before they make it fully public. It allows investors to make fair-minded estimations about their value. The main thing is that people making these investments have full knowledge about the Pros and Cons.
On the other hand people who invest in an ICO have comparatively less knowledge of what they are investing in and what will be the nature of their return. But it can be easy for you if you follow the following principles devised by our crypto experts:
Factors You Must Examine
- Is the admin panel team of that company experienced?
- Does the product offered by the company have a good market? If the product isn’t a hot item, there’s is no use to invest in it.
- You must have proper knowledge of the blockchain technology which is underpinning the sale. How many tokens have been distributed uptill now and what is their security level.
- The legal and regulatory stuff surrounding the company is safe or not?
- What are the terms and conditions outlined in the white paper and do they look fair?
We hope that after following these rules and regulations it will be easy for you to make a smart decision in terms of ICO investment, still we are waiting for your suggestions and criticism in the comments section below.