How the F*ck does an ICO work?

How does an ICO work technically?

Cryptocurrencies and their expanding markets have caught the attention of many mainstream investors and they want to try their hand at it. Unfortunately, this is a highly technology-driven field and most prospective investors don’t understand how investing works. People looking for new investment opportunities are interested in ICOs and want to know how they work. This article explains the technical process behind it so prospective investors can decide if this is the right option for them.

What is an ICO?

ICO stands for Initial Coin Offering and is a fundraising process. Companies create their own cryptocurrency platform and encourage investors to invest in the venture through tokens. Investors can purchase these coins or tokens with fiat currency or cryptocurrency options like Bitcoin or Ethereum. If the venture is successful, these tokens or coins will appreciate in value and offer substantial returns to the investor.

The venture will also give the company enough capital to start whatever business venture they wanted to initiate with the help the funding. ICOs have already proven to be more effective that VC funding.

So, how does it work?

The coins or tokens offered are cryptocurrencies with no real value. They’re just smart paper contracts that investors can purchase and fund with the hopes they will develop value down the line. By investing in the coins, investors add value to it and as more investors invest the value increases.

Investors play a key role in developing this value because they promote and convince their peers to invest into the tokens as well. They create the hype and anticipation, which encourages speculation and increases investment. As the coin develops value, it can be used to purchase other coins or can be traded in the market. The idea is to turn the token owners into future customers instead of having them remain just investors.

What gives new tokens legitimacy?

It's easy to assume that people can create tokens or cryptocurrency coins on the fly and gain capital on the market, but it doesn’t work like that. Several ICOs have failed because they didn’t have the right technology or good network in the industry. The platforms grant the tokens legitimacy and marketability.

Most modern tokens and coins run on platforms like Ethereum and Ethereum Classic ERC20 Tokens or Counterparty. These are already established blockchains and are publically accessible to everyone operating on this platform. Every coin or token created is visible in these blockchain ledgers and are therefore easy to keep track of.
The blockchain provides unalterable smart contracts as proof of investment or purchase, which ensures the transactions are transparent.

Investors need this transparency and clarity because this is an emerging but unregulated market. There are few laws and rules in place to protect customer interest and that is a double-edged sword. If people invest wisely and study the market well, they have the potential to make a lot of profits. Investors just need to take time to do their research in order to avoid scams and poor ICOs.