What is an Initial Coin Offering (ICO)
ICO (An initial coin offering) is similar to the crypto industry’s IPO (an initial public offering). A company intending to raise money to create a new coin, app, or service launches ICO that helps raise funds.
The company can issue tokens, and interested investors can buy into the offering and get a new crypto token. This token might help use the company’s service and product. However, it might just represent a stake in the project and company.
KEY TAKEAWAYS
- ICOs represent a standard fundraising method that startups offer products and services usually related to the blockchain area.
- Some Initial Coin Offerings have created extensive profits for investors. Many others worked poorly or turned out to be scams.
- In order to engage in an ICO, investors have to buy a digital currency first and understand using crypto-wallets and exchanges.
- ICOs are mostly entirely unregulated. Therefore, investors have to be cautious when they decide to start investing in ICOs.
How an ICO Works
When a crypto startup intends to raise money using ICO, the company typically sketches several points. Those main points are: what the project is all about; the number of virtual tokens the company will keep; the type of money allowed; the demand the project will be able to fulfill after completion; the amount of money needed for the completion; the duration of the campaign.
Through the ICO campaign, supporters of this project buy some of the project’s tokens with digital currency. These coins represent tokens similar to shares of a company that investors buy during an IPO. If the offered money can not meet the minimum conditions set by the company, the supporters might receive funds back; in this situation, the ICO would be unsuccessful. If the funding requirements suit the specified timeframe, the raised money is applied to proceed with the project’s plans.
Special Considerations
Investors concerning purchasing into ICOs first have to get familiar with the crypto industry. In the case of most ICOs, investors need to use existing cryptos in order to buy tokens. In other words, a beginner ICO investor will require to have a crypto wallet set up for ethereum or bitcoin with a wallet able to hold any token investor intends to purchase in the future.
There is no method to get informed of the newest ICOs. The best thing new or experienced investors should do is to check new projects online permanently. There are many sites available online where all kinds of investors can gather and discuss new opportunities in the sector. For example, there are plenty of websites aggregating ICOs. They let investors investigate, analyze different offerings, and find out new ICOs.
Initial Coin Offering (ICO) vs. Initial Public Offering (IPO)
There are a few necessary ways for growth and development for traditional companies before raising funds. From the beginning, a company can be small and later grow as its profits grow. But, this also means the company owners have to wait for a long time for funds to grow and make actual profits. The good news is that companies can search for outside investors to get support earlier, providing them with a fast influx of cash. However, it implies some sacrifice from the company owners as they need to sell a significant portion of the ownership stake. Another way is to go public, earning funds by selling shares to individual investors through an IPO.
ICOs might deal with supporters interested in investing in new crowdfunding campaigns, while IPOs deal solely with investors.
There are some other differences between ICOs and IPOs. For example, ICOs are mostly unregulated, and because of their decentralized nature, ICOs seem to be more convenient in structure.
ICOs are structured in some ways. Sometimes, a company decides to set a particular goal. It means that every token sold during the ICO comes with a pre-determined price and that the total token supply is firm. In some cases, there is a static supply with a dynamic funding goal. This means that the distribution of tokens will depend on the total funds received in the ICO.
Examples of an Initial Coin Offering
When evaluating ICOs, investors can consider the money raised during an ICO and the return on investment.
In 2014, for 44 days, Ethereum managed to raise $19 million.
In 2015, a two-phase ICO began for a company called NEO (previously known as Antshares). During the period between October 2015 and September 2016, the company earned nearly $4.7 million.
As ICOs appeared in the blockchain and crypto industries, they also brought risks, challenges, and unexpected opportunities. Many investors believe that if they buy into ICOs, they will get a quick and robust return on their investments. The most successful ICOs are the source of investor enthusiasm over the past several years, as they have provided investors with huge returns. However, this kind of hope can also lead investors astray. ICOs are full of fraud and scam artists as they are mainly unregulated. Funds lost because of fraud or inexperience might never be recovered since financial authorities do not regulate them. The sudden rise of ICOs in 2017 produced reactions from various governmental and non-governmental entities in the same year. For example, the People’s Bank of China decided to ban ICOs officially.
The Chinese central bank banned banks from offering services linked to ICOs and prohibited using tokens as currency. As a result, Ethereum and bitcoin prices fell. The ban also affected already completed offerings. At the beginning of 2018, networks including Twitter, Facebook, and Google forbade ICO advertisements.
Overall, there is no guarantee that any investor, whether an experienced or complete beginner, won’t be a victim of a scam when funding in ICOs. In order to stay away from ICO frauds and scams, investors should ensure that project developers clearly define their goals. Successful ICOs have detailed and organized whitepapers with clear goals. Investors should start looking for legal terms and conditions established for the ICO because it is on investors to ensure a legitimate ICO.
