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What’s the Difference Between an ICO and an IPO?

In the world of investment, IPOs – or Initial Public Offerings – have been around for years. But now there’s…

By editor , in The Public Markets , at August 7, 2018

In the world of investment, IPOs – or Initial Public Offerings – have been around for years. But now there’s a new acronym on the block: the ICO (Initial Coin Offering) – often referred to as cryptocurrency crowdfunding. It sounds similar and in essence it does bear a few similarities to an IPO, in that it is based about companies raising funds from the public. Here are the three main differences, though.

  1. The Main Basis

If a company wants to hold an IPO, then it is going to have a legitimate, provable background of quality. In fact, regulations dictate that to hold an IPO, a company will need to have a minimum earnings threshold before it can even legally hold one. On the flip side, an ICO is not something that requires regulation – although this is gradually changing. Also, ICOs are launched by start-up companies with no previous history or financial credibility. This means that a lot of focus for potential investors goes on their plans, forecast and roadmap – the whitepaper.

  1. Your Return on Investment

With an IPO, your ROI is credible, in that your stake represents a tangible percentage ownership of the company in question. If the company grows, your money grows too. With an ICO though, your stake is directed into the purchase of coins (or tokens). These tokens will then potentially increase or decrease in value within the cryptocurrency sphere, and the value you gain lies within the ecosystem that the start-up creates. This means that if you have no particular interest in the actual project that the start-up is putting together, you’re going to be much less likely to invest than you might with an IPO.

  1. Access

This is a biggie. IPOs are generally (but admittedly not always) only accessible to large, institutional investors. ICOs, however, are open to absolutely anyone. Now, it is true that crypto start-ups have private and public sales, but the public element is completely open to anyone with a computer and a bank account. While this is great for the general public who want to get into investing though, when combined with a lack of regulation and too little readily accessible education for your everyday wannabe investor, you get a lot of fraudulent ICOs defrauding average Joes left right and center.

The upshot is that both IPOs and ICOs are there as tools for fundraising, and both can yield profits for investors. But just because you can access an ICO more easily doesn’t necessarily mean you should. As always, it’s important to exercise caution and do your research before parting with your hard-earned funds!