Should you buy into ICOs?

Tech entrepreneurs have created a new way of raising money for investments, known as the initial coin offering (ICO). They are currently all the rage. But should you buy in?

The growth of peer-to-peer (P2P) lending and the creation of the blockchain (the technology that underpins bitcoin and other cryptocurrencies) have been two of the most interesting developments in the world of finance in the past few years. Now tech entrepreneurs are combining the two concepts to create a new way of raising money for investments, known as the initial coin offering (ICO).

An ICO is a bit like an initial public offering (IPO), in which a company offers shares to investors. Instead of selling shares for cash through a stock exchange, an ICO involves exhanging "tokens" for cryptocurrencies (such as bitcoin or ether). ICOs are often set up on an existing blockchain platform such as Ethereum or Hyperledger. You could very broadly think of these platforms as performing the role of a stock exchange in an IPO, but it's important to realise that blockchain platforms do not regulate or oversee tokens in the way that traditional stock exchanges regulate listed companies. However, they allow entrepreneurs to easily create "smart contracts" that automatically enforce the rights associated with the tokens.

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Ben Judge

Ben studied modern languages at London University's Queen Mary College. After dabbling unhappily in local government finance for a while, he went to work for The Scotsman newspaper in Edinburgh. The launch of the paper's website, scotsman.com, in the early years of the dotcom craze, saw Ben move online to manage the Business and Motors channels before becoming deputy editor with responsibility for all aspects of online production for The Scotsman, Scotland on Sunday and the Edinburgh Evening News websites, along with the papers' Edinburgh Festivals website.

Ben joined MoneyWeek as website editor in 2008, just as the Great Financial Crisis was brewing. He has written extensively for the website and magazine, with a particular emphasis on alternative finance and fintech, including blockchain and bitcoin. 

As an early adopter of bitcoin, Ben bought when the price was under $200, but went on to spend it all on foolish fripperies.