What Is An ICO?

If there's been one word on the lips of everyone in finance this past year, it's cryptocurrency. If you've been kicking yourself for not getting in on the ground floor of blockbuster coins like Bitcoin and Ethereum, you might want to consider looking into investing in an Initial Coin Offering (ICO). Be warned, however: ICOs are highly risky even under the best of circumstances, and have a high potential for scams.

So What Exactly Is An ICO, Anyway?
Imagine this: You're a Silicon Valley startup with a great idea for a new cryptocurrency system. Perhaps you want to streamline the Parent/Babysitter payment system so that it can be digital and encrypted. What a great idea! Let's call it BabyCoin. The only problem is you need people to give you money so you can actually make the currency. Now, you could go to a bank or try getting venture capitalist investors, but what if you could raise money without having to give up any of your ownership of the company? Enter ICO.

Here's how it works, You create a document essentially detailing exactly how the system would work (usually called a white paper), make a pretty website and explain why its a great idea that could be very useful. Then, you ask for people to send you money (usually Bitcoin or Ether, but you can also take fiat) and in return you send them back some BabyCoin. They hope that BabyCoin will get used a lot and be in high circulation, which would raise the value of the currency.

Its important to note that unlike an Initial Public Offering (IPO), investing in an ICO won't result in you having an ownership stake of the company you're giving money to. You're gambling that the currently worthless currency you pay for now will increase in worth later and make you money.

The Bottom Line
In the end, ICOs are an incredibly new way of raising money, and everyone is trying to adapt to the new ways without getting screwed over. If you think you're able to make a killing on a promising new ICO, just make sure to do your homework beforehand. Cryptocurrency is all about high risk, high reward, and ICOs are no different.

Investing in cryptocurrencies and other Initial Coin Offerings ("ICOs") is highly risky and speculative, and this article is not a recommendation by Investopedia or the writer to invest in cryptocurrencies or other ICOs. Since each individual's situation is unique, a qualified professional should always be consulted before making any financial decisions. Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein. As of the date this article was written, the author owns no cryptocurrency in any quantity.

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