If you’ve been following either the tech or financial world than you know just what a feeding frenzy initial coin offerings (ICO) have become. For those who haven’t, an ICO is when a cryptocurrency (such as Bitcoin) opens up to the public. It’s similar to when a company goes public and starts selling shares openly for the first time.
But while it’s a similar concept, initial coin offerings have significant downsides compared to a company going public: it isn’t as regulated, and there tends to be a gold rush mentality because of the huge successes other investors have had with cryptocurrencies.
But before we get into that, let’s start with the basics.
Cryptocurrency refers to online to a virtual currency that’s secured through encryption. Basically, it’s a program that lives in the cloud and shared by a variety of users. Think of it like a Dropbox folder that has a single document or balance sheet that keeps track of who has how much of the currency, and who is giving money to who.
The crypto part of cryptocurrency is more complicated, but all you need to know for the purposes of this article is that cryptocurrencies are virtually immune to hacking from outside parties, and that more of the currency can be accessed by “mining” mathematical formulas with high powered computers.
Ultimately, because people treat it like it does. Very, very few currencies are inherently “worth” anything. If you find yourself on a deserted island, the US dollar is useful for starting a fire, but not much else. Even something we consider as fundamentally valuable as gold isn't inherently worth that much. Currencies are valuable because it’s more convenient for us all to treat them like they are rather than to haul around goats everywhere to use as trade.
This question does get at the heart of why initial coin offerings can be both appealing and dangerous, though. A government backed currency like the US dollar is carefully regulated so that there’s never too much or too little in circulation at any given moment, and you as a holder of the currency can go at any time and the government will allow you to turn it in for another currency.
Cryptocurrencies aren’t backed by any government, or any single outside source at all. Once a cryptocurrency is “in the wild” there’s no way for it to be regulated or changed by a central source. Its value and exchange rate can fluctuate wildly with no guarantee it will be worth anything at all from one day to the next. This means, by investing during an ICO, you could be a millionaire in a year’s time or have nothing at all.
Ultimately, for the lay person, investing in an ICO doesn’t make that much sense. They’re fickle things, and it takes an expert to tell a profitable one from a dud.
You should definitely not invest in an ICO if you’re looking to fix your financial situation in the short term. A better option for that is an installment loan, which is designed to get you cash quickly. An ICO is a long-term gamble and not one that’ll help you bounce back from a financial setback.