- What is an ICO?
An initial coin offering (ICO), also known as a digital token sale or crowdsale, is a way of raising funds from the public for the development of a product outside of the traditional VC world. Usually products are blockchain-based technologies, but the crowdsale model is increasingly being used for other kinds of projects as well.
Each project creates a new cryptocurrency in the form of tokens, which are then sold to the public to raise funds for project development.
If a product successfully completes their ICO funding goal, their tokens are distributed to those who bought them and they become tradeable on the cryptocurrency market. If the product itself is then successful, these tokens can potentially become very valuable (ex. this is what happened with ETH, the computing platform Ethereum's coin, which was originally sold to the public as tokens during the project's own ICO).
- What are tokens?
A token is a digital asset that is sold to the public during an ICO campaign, usually for other popular cryptocurrencies, namely BTC or ETH, or sometimes directly for fiat currency. Unlike a cryptocurrency, tokens usually do not have their own blockchain, but rather are hosted on another blockchain, such as Ethereum's.
Once an ICO campaign is complete, the token developers can release the tokens on an exchange, where they can be traded and fluctuate in value, like any other cryptocurrency.
Tokens can also have other functions that are particular to the product that issued them. However, tokens themselves do not necessarily give rights or equity to the product/company that originally issued them - in that sense tokens are definitively not equal to shares in a traditionally structured company.
- What are the risks of contributing to an ICO?
When you contribute to an ICO, there is never a guarantee that the product whose tokens you're buying will succeed, either with their ICO or in their future development. Like any crowdfunding campaign, people should think of contributing as a donation to a project in support of its potential development, and the tokens as a kind of reward for your support. However, in the case of an ICO campaign, your reward (tokens) has the potential to increase in value once the tokens are released and available on exchanges. Bottom line, each particular ICO also has their own terms and conditions for contributing, so be sure to check those out before donating.