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What is an Initial Coin Offering (ICO)?

What is an Initial Coin Offering (ICO)?

Cryptocurrencies and initial coin offerings (ICOs) are relatively new avenues for investment. Cryptocurrency is a form of digital currency that lets people make payments online, and its value is based on supply and demand. Some believe that cryptocurrency is more like a digital asset and less like a digital currency, which is distinct from  traditional fiat currencies like the Australian dollar.

Cryptocurrencies are typically created through a distributed ledger technology (DLT), also called a blockchain where transactions are stored and shared. Think of it as an open general ledger for a network where everyone on the network can see every debit, credit, and line item. Once every part of the transaction tallies up, the cryptocurrency gets generated. Typically, the same technology is used to generate or mine tokens, which form a crucial part of an ICO.

Initial Coin Offerings work on the same principle as a cryptocurrency except instead of mining the currency, the system mines a token that carries some value. A company looking for funding issues these digital tokens to its investors, which are then bought through an online auction, service, or exchange. These tokens are usually generated to help the company earn money for specific projects, making them similar to a stock. 

Traditionally, a company might try to generate funds through an Initial Public Offering (IPO) by listing its shares on the stock exchange so that the general public can buy them.  

ICOs may sound similar to IPOs, but they have several points of difference. Here’s a comparison:

Initial Coin Offering (ICO)

Initial Public Offering (IPO)

An ICO is usually offered by an emerging company.An IPO is usually floated by an established company.
Funds earned through the ICO are typically invested in a project.Funds earned through an IPO are typically invested in a company or an asset.
Details about the project are listed in a white paper.Details about the company or asset are listed in a prospectus filed with the Australian Securities and Investment Commission.
Your legal rights and protections are relatively lower. Offers legal rights and protections to investors.

As such, ICOs have become a new way to fundraise, offered to technologically savvy folks as well as retail investors. 

Before you invest in either, go through the investment, do your own research and make an informed decision about whether it's an ideal addition for your portfolio. 

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This article was reviewed by Personal Finance Editor Mark Bristow before it was published as part of RateCity's Fact Check process.



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