The world of cryptocurrency is quickly becoming one of the most exciting branches of finance. It’s growing at an incredibly fast pace and some of the world’s biggest cryptocurrencies are already worth more than the world’s biggest companies. Due to this, many investors are looking for ways that they can get starting buying and selling cryptocurrencies.
One of the most common ways to do this is by buying into cryptocurrencies right when they are first launched, in a process called the initial coin offering.
This article will take a look at the pros and cons of investing in initial coin offerings.
What is an Initial Coin Offering?
If you’re not familiar, an initial coin offering is the first time that an online cryptocurrency or similar type of token is made available for investors to buy. Sometimes, this digital token will have some type of utility related to the product or service that’s offering it. For example, you might be able to use the token to buy or sell products within the application. However, most times the token just represents your stake in the company or project.
Most often, ICOs are used as a method for raising money to create a new coin, app, or service. In this sense, they are very similar to Initial Public Offerings (IPOs) on stock exchanges. During initial public offerings, companies issue shares of stock to investors. Companies receive the money that investors pay to buy the shares and, in return, the investors receive a stake in the company.
The main takeaway from both IPOs and ICOs is that a company or organization offers the public the opportunity to invest in their company or project by buying shares of stock or tokens.
If you’re an investor then you might be interested in participating in an initial coin offering as it can be a good way to get in on the ground floor of an exciting new cryptocurrency project.
However, just like almost every investment, there are pros and cons behind investing in initial coin offerings. Let’s take a look at what some of those are.
Pros of Initial Coin Offerings
We’ll start with some of the benefits that come along with investing in an initial coin offering.
- Potential for profit – Cryptocurrencies are known for being incredibly volatile. For example, Bitcoin used to cost less than one dollar. Today, its price is almost $50,000 per coin. This means that if you had known about Bitcoin years ago then you could have made plenty of money through this growth. The same opportunity is available today for new ICOs.
- Rising in popularity – ICOs are becoming increasingly mainstream. As this trend continues, they will become less and less risky.
- Alternative investment – ICOs can be a good way to diversify your portfolio into an alternative asset class.
- Be a part of exciting projects – Just like buying shares in an IPO, ICOs allow you (as an investor) to take part in an exciting new company or project.
These are just a few of the positives that are associated with investing in ICOs. However, despite all of these advantages, there are also plenty of disadvantages when it comes to investing in initial coin offerings. Let’s take a look at what some of those are.
Cons of Initial Coin Offerings
Much more so than most investments, initial coin offerings are ripe with risk. This is one of the biggest disadvantages to participating in them:
- More risky than IPOs – From an economic perspective, a lack of regulation is one of the biggest advantages to cryptocurrencies. However, this lack of regulation can quickly go south for investors who have bought into fraudulent initial coin offerings. By this, we mean that there is no regulating body to go to for help if something goes wrong with the initial coin offering.
- Fraud/scams – Many initial coin offerings are backed by legitimate people with legitimate projects. When this is the case, the initial coin offering will usually go very successfully and can bring incredible returns for their investors. However, since the best ICOs can turn people into millionaires very quickly, scam artists are quick to follow and attempt to lure unsuspecting investors who are looking to get rich quickly.
We hope that you’ve found this article valuable when it comes to learning a few of the pros and cons of investing in initial coin offerings. If you’re interested in reading more, please subscribe below to get alerted of new articles as we write them!