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What Is an ICO?

Last updated: October 26th, 2021

ICO stands for "Initial Coin Offering," and is also known as a “token sale” or "crowdsale." It is an unregulated fundraising method for startups. Startup companies use these funds to further develop and complete their blockchain-based software projects. An ICO is similar to an IPO ("Initial Public Offering"), in which investors purchase shares of a company.

In an Initial Coin Offering, users who support a project by sending crypto are given tokens in return from the startup. When you give these ICO teams your ETH, BTC, or other currencies, it means that you believe that the technologies they are creating will bring value to the blockchain.

At the beginning of an ICO, the leading team will explain its vision, and will normally provide a white paper. This white paper contains a lot of valuable information that you should read before participating. Even if you do not understand a lot of the technical terms, as long as you get a basic understanding of what the token is about, it will help in your decision making.

Take note of the team and web developers behind the ICO. Reputable programmers and business people usually mean that the ICO is legitimate and that it has a lot of potential. Sometimes, these teams recruit well-known Facebook developers / managers or Google employees. This is a good indication that the token team is truly creating something valuable.

It is crucial that you do your research on an ICO that you are interested in. The ICO craze in the community has lead many people and fake companies to create “scam ICOs” simply because it is easy to raise money when hype is created around a token. Scam ICOs usually execute the “pump and dump” method for gaining maximum profits. Creating hype around a token is fairly easy to do, and you should try your best not to let FOMO (fear of missing out) cloud your judgment. Hype can be easily created through posts on Reddit, Facebook, Slack, etc., by people who are looking to make a quick buck.

Pump and Dump (when a token hits exchanges): When a token is full of hype and no backbone or actual real-world value, some opportunists will take advantage of the publicity. Everyone will see that the token is performing exceptionally well on exchanges and buy in, but some may be ready to dump a substantial number of the tokens back into the market when the value peaks (hundreds of thousands—sometimes millions—of dollars' worth of the tokens are cashed out). This activity causes the price to plummet and everyone else starts to panic, selling off their tokens to cut their losses.

The value of tokens, ETH, BTC—the prices are all driven by the market. You have the ability to make the price go up or go down. It follows the supply and demand economic concept. If there are more people who want a token but there is a limited supply, the price increases. If no one wants the token, there is a surge of supply available on the market, and the price decreases.

There are many successful and truly valuable technologies and concepts that have come out of ICOs, and that is a good thing. But you must always remain vigilant and do a lot of research before investing in anything.

After doing your own research and making a decision that a token is worth investing in, the next steps are to buy into the ICO.

For more information please refer to Best Ways to Avoid Missing Out On That ICO.

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