Initial Coin Offering (ICO)
In the cryptocurrency & blockchain world, an ICO (initial coin offering) is a sort of crowdfunding operation. Investors acquire specific cryptocurrency “tokens” in return for their financial investment in the project or firm through ICO trading platforms. It is a type of capital-raising activity in which a digital token is created and sold to raise funds for a project’s development.
This one-of-a-kind token works as a currency unit, granting investors access to specific aspects of the company’s initiative. Such tokens are special in that they aid in the funding of open-source software initiatives that might otherwise be difficult to fund through standard methods. An initial coin offering may be thought of like an IPO (initial public offering). But, it wouldn’t be the most accurate comparison because the two capital-raising efforts differ significantly. An ICO is typically used by startups to raise funds.
How Does it Work?
At first look, ICOs appear to be similar to initial public offerings (IPOs), in which firms sell stock to the general public via a stock market. However, while IPOs are supervised by the US SEC (Securities and Exchange Commission), ICOs are generally not regulated, and as a result, several ICO currencies have found themselves in hot water due to violations of federal laws. One other significant distinction is that purchasing crypto tokens doesn’t really imply that investors will control a portion of the firm.
The first stage in creating a viable ICO is to develop a business strategy and investigate how blockchain will be involved. Initial coin offering investors or venture capitalists can provide early feedback to enterprises. The initiative will then create a white paper that describes what their digital currency is made for, as well as forward-looking info regarding the expected investment returns for contributors.
Since they have little legitimacy, most crowd sales fail to acquire traction at this level. The newfound token might be viewed as a problem in need of a solution. An absence of social media buzz might also make fundraising hard. Roughly 53.3 percent of initial coin offering projects failed to conclude their sales in 2018.
Prospering ICO projects will need to publish their digital assets on cryptocurrency exchange platforms. Due to the blockchain’s smart contract feature, Ethereum is often used during token sales.
How to Launch an Initial Coin Offering
Launching a personal ICO is as simple as designing a crypto token, deciding on a date, and establishing regulations for the said token sale.
There are a lot more factors to the ICO procedure than just raising dollars. The most crucial aspect is to have a cryptocurrency project that investors want to support. Project owners will also need to figure out how their new coin will integrate into the project. Creators also need all of the things mentioned below, throughout the ICO process:
- A document detailing the project’s goals and objectives
- A plan containing short- and long-term objectives
- Conducting market research regarding different ICOs
- A webpage and a presence on social networks
- A public relations campaign
An ICO will still require a committed team to accomplish the goal. Creators can form their own team or collaborate with an ICO firm that works with these types of launches.
ICO Regulation
The majority of initial coin offerings (ICOs) are not regulated. There are no explicit restrictions that relate to ICOs in the US. If, on the other hand, an ICO falls under the Securities and Exchange Commission’s jurisdiction and is subject to federal laws, it is controlled by the SEC.
Some nations have taken a hard line and outright outlawed ICOs. China, Nepal, Bangladesh, Macedonia, Bolivia, and Ecuador are among the countries that have prohibited ICOs.
The Risks
Any token purchased through an ICO is regarded as a highly risky investment. The industry is unregulated, scam ICOs exist, and investors are left with little recourse if an ICO flops or proves to be fake. According to a 2018 Satis research for Bloomberg, about 80% of initial coin offerings at the period, were regarded to be fake transactions.
It’s critical to also include the elements in the due diligence process for people interested in participating in an ICO:
Examine the project’s team to determine if they have demonstrated success in starting and running enterprises. Team members must, preferably, include links to their social media profiles so that they may be reached.
Examine the project’s white paper and route map to learn more about the desired product or service, as well as when particular features will be available.
Examine any computer code that has been verified by a third party. This is a positive sign that an initiative is concerned about its privacy.
Search for mistakes on the webpage; this is generally an early warning sign that the site was put up fast and without much consideration.
Tokens, particularly ones that have sold well, are frequently posted on cryptocurrency exchanges. Newbie investors that missed out on the token offering will be able to acquire the coins once they are published. If a startup has done a good job of marketing itself, there may be a lot of demand for its token after the ICO.
Pros and Cons
ICOs include both advantages and disadvantages. Here are some of the benefits they provide:
- If an investor can figure out which coin is a solid investment, then they can make a lot of money. Prices are frequently lower because they’re purchasing early, and other ICOs give tokens at a discounted price.
- Everyone can participate in an ICO. There are no limits as to who can invest, unlike certain IPOs.
- It’s a quick and easy way for start-ups to raise capital.
The following are some of the downsides of ICOs:
- Since crypto projects are so unpredictable, there’s a good chance the token may decrease in value or perhaps collapse.
- As a result of the absence of control, there are more frauds and inferior initiatives. It might feel like looking for a needle in a haystack while sifting through future ICOs for a good project.
- Investing in ICOs typically demands some understanding of cryptocurrency wallets. It’s typically better to stick to crypto stocks or publicly traded currencies for folks who are inexperienced in the crypto field.
Final Thoughts
An ICO is a hybrid of an initial public offering (IPO) and online fundraising, but for cryptocurrencies. At a date defined by the token issuers, one can donate “X” quantity of a current token and get “Y” quantity of a fresh token (at a specified conversion rate).
The token may be used in two different ways: as a utility token or as a security token. The first one is a type of cryptocurrency that is used by entrepreneurs to raise funds for their initiatives in return for future entry to a service that is still in progress. A security token, though, is often classified as a stock, a traded asset containing ownership characteristics that are controlled by the Securities and Exchange Commission (SEC).
SEE ALSO: What Is Cold Storage?
