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Jul 7, 2022

Initial Public Offering (IPO)

The term “initial public offering” (IPO) refers to the sale offering of a private company’s crypto assets to the public.

If you keep up with crypto market news, you've probably heard the term "IPO" being tossed around before. These one-time-only events let people get in on the ground floor of an investment. They have some great perks, but also come with some potential downsides. Understanding what an IPO is can help you make smart decisions while investing your funds.

What Is an Initial Public Offering (IPO)?

An initial public offering (IPO) is a private corporation's first time letting the public buy crypto assets in its company. This unique opportunity provides some alluring investment opportunities.

IPOs take place any time a private corporation wants to become publicly-traded. The corporation issues new crypto assets that anyone can purchase on a publicly-traded crypto exchange. People then buy this crypto asset, essentially becoming investors in the company. In exchange for the funds they receive from the public, the business may give up some control of their company, and have to submit to increased SEC guidelines.

Usually, private companies only launch their IPO once they've already had significant public growth.

How Does an IPO Work?

An IPO might seem simple, but there’s a lot that occurs behind the scenes. Crypto companies don't usually just start offering a random amount of crypto assets at a completely made-up price. Instead, they need to work with a lot of other experts. Typically, a business will start by finding an underwriter or a bank that specializes in IPOs. They’ll need to go through a lengthy underwriting process, in which independent experts evaluate the business's worth. 

After performing due diligence, the crypto company will want to generate more hype around their cryptocurrency, and decide how many assets to offer and at what price. They may also need to take input from the crypto exchange on which they want to release their assets. Crypto exchanges typically require a company to offer a minimum number of public shares.

In addition to these newly created public shares, IPOs also involve a conversion of existing private shares. Once the corporation goes public, any existing private shares turn into public shares. This allows existing private shareholders to potentially cash out and sell their crypto assets to the public.

This process can take quite a bit of time. For example, when the Blockchain.com crypto exchange announced plans to go public, they asserted it would probably take at least half a year to sort out their IPO.

The Benefits and Risks of an IPO

Whether you're a potential investor or a private share owner, IPOs have both pros and cons. To decide whether an IPO is a smart move, it’s recommended that you carefully consider a company's value and its unique situation.

Benefits of an IPO

For companies, IPOs are one of the best ways to raise capital. Instead of having to seek out individual investors, they can solicit funds from the general public. The ability to raise more capital allows businesses to hire new employees and initiate developments that increase profits. IPOs also let private investors make more money. If you have private stock before an IPO, the IPO can either let you liquidate your investment, or hold onto your shares and watch your investment value rise.

Since a company cannot successfully manage an IPO unless they're doing well, an IPO also helps to raise its public image. A positive performance in the first few days of an IPO tends to result in increased favorable exposure for a company. This can boost their reputation and help them experience even more favorable growth.

For people interested in purchasing the stock, an IPO gives you the opportunity to acquire shares for a lower price. If the company continues to improve and increases in value, its IPO price might be the lowest that the stock ever has. Even if values do fluctuate, IPOs tend to generate a lot of interest and market activity. A savvy stock and crypto market investor can take advantage of this volatility to make smart moves.

Risks of an IPO

The primary concern with an IPO is that it can be fairly complex. Going through the underwriting process is expensive. Even after the IPO is complete, there are still ongoing legal, marketing and accounting issues to deal with. Management has to spend more time maintaining a public reputation and trying to keep their share prices high.

Furthermore, going public requires the company to adhere to strict government regulations. As part of these regulations, they have to become more transparent. Giving the public access to things like secret business methods or the true state of company finances is often risky. It may give competitors an edge.

If you're considering purchasing crypto assets in an IPO, it's important to exercise caution. Keep in mind that the IPO valuation isn't a true representation of a crypto asset’s public valuation. There’s always a chance that the token you purchase in an IPO might crash. This is especially true if you get involved with a company that has internal problems. Early investors may see the IPO as a chance to flee a sinking ship, and when they all sell, crypto values can crash.