Do you read “going public” in the news and wonder what it means or how you can get involved? Maybe you have been told IPOs can generate outsized returns, but didn’t understand the basics or even where to begin. The simple fact is, most individual investors are unable to access IPOs prior to the the equities hitting a major stock exchange. With the new world of Initial Coin Offerings (ICOs), more people have access to early investment in exciting companies.
An IPO is an Initial Public Offering, which means a private company is allowing the public to invest in their stock for the first time. Typical IPOs are underwritten by investment banks, and allow the newly public company’s stock to be traded on an exchange (like the NASDAQ).
An ICO (Initial Coin Offering) works similarly, providing a mechanism which gives interested buyers the opportunity to exchange cryptocurrencies for a share of the company. The biggest difference between an IPO and an ICO is that anyone with a computer and even a small amount of spare money can get started investing in exciting new companies. To buy shares in an IPO, a buyer usually must be involved in a syndicate, and/or have a large amount of free cash available to invest. With as little as $1, an investor can invest in an ICO and participate in the company’s upside.
Although full of potential, Initial Coin Offerings don’t come without certain risks. Investors should be sure to do their homework before jumping in. One possible risk is that the company could abandon the project. Some ICOs may meet the capital goal but then decide to keep the money and not follow through with the start-up idea. Because the network is decentralized, there is no official auditor to verify the validity of the project. Coin offerings sometimes are held before the company has made any significant progress.
Another risk is overvaluing a token based on its possible future gains. Many cryptocurrencies in the past have steadily increased and proved to be a profitable market. Due to this success, the token values are often overestimated and may leave the investor with less than they expected. Without extensive research, investors may find themselves losing their initial principal quickly.
ICOs are a simple way to get started and become familiar with the different types of cryptocurrencies and blockchain technologies out there today.