An ICO refers to essentially the same thing as an IPO but in the crypto-verse. Technically speaking, it defines a process in which a firm generates funds by using digital coins or tokens that are supposed to fund a new blockchain application or service.
An ICO is a form of crowdfunding in the cryptocurrency world. Companies take ICOs to collect funds for a new blockchain project. Investors put cash or any other cryptocurrency in that blockchain-based project for tokens. Tokens can be any form of ownership, future products, or services. The popularity of ICO has gained because it saves startups from traditional funding methods, but there are a lot of risks in this market related to cryptocurrencies
Key Takeaways
- The Initial Coin Offering is one of the most popular methods by which people raise funds for their cryptocurrency-related products or services.
- The Initial Coin Offering is the same type as an IPO, but the coins can also perform a certain service or product.
- A few of the Initial Coin Offerings were successful, while others emerged to be scams or underperformers.
- Typically, Initial Coin Offerings are classified as securities and are registrable.
Introduction: What is an ICO?
An Initial Coin Offering is the cryptocurrency version of an IPO in the stock market. Exactly like an IPO, which aids companies in raising money through share issuance, an ICO helps cryptocurrency projects raise money through issuing and selling digital coins or tokens.
Investing in an Initial Coin Offering is trading in a new cryptocurrency or blockchain project before it fully launches through tokens. Recently, more people have gained popularity with Initial Coin Offering because they give early investors a chance to make money out of emerging technologies. However, an investment in an ICO comes with several risks that the investor has to be informed of before getting into the game.
What is an ICO? A Full Explanation
An Initial Coin Offering is like an IPO for cryptocurrencies. It allows the companies to raise money for a new blockchain project with the help of an ICO. In this, the investors receive new cryptocurrencies instead of their money. These cryptocurrencies may be used for several ends, such as access to future products or services, or a part of the project.
An Initial Coin Offering begins with a cryptocurrency project that has some new idea: be it a blockchain platform or the DApp. To facilitate the Initial Coin Offering, the project team produces a whitepaper, describing the concept, objectives, and technical information including details regarding the ICO itself, such as the supply of tokens, pricing, and fund usage. It’s done to have a pre-sale even before launching so that early investors may buy tokens at discounted rates. Once the Initial Coin Offering is opened, a person can purchase tokens using his or her Bitcoin or Ethereum. Tokens are allotted to the investors after the end of the Initial Coin Offering and they can sell them on exchanges.
True, smart contracts are utilized quite often in Initial Coin Offerings. They are self-executing contracts in the form of code. These exist on blockchain platforms such as Ethereum, where they operate a secure and automatic process of collecting funds and distributing the tokens without any interference from a central intermediary. This provides a relatively more hassle-free and clear process for an ICO.
Examples of Initial Coin Offerings
Here are a few examples of Initial Coin Offerings:
- Ethereum ICO in 2014: Ethereum managed to raise $18 million in 42 days
- Dragon Coin ICO in 2018: Dragon Coin reportedly collected $320 million in one month.
- EOS ICO in 2018: EOS collected a massive $4 billion within one year of ICO.
The SEC first acted on December 11, 2017, when it blocked an ICO of Munchee, a California company attempting to launch a food app cryptocurrency, terming it an unregistered securities offering.
How an Initial Coin Offering Works
The first step of any cryptocurrency project in an Initial Coin Offering is to determine how to structure the coin. Initial Coin Offering can be structured in many ways, including:
Fixed supply and fixed price: Under this model, the number of tokens is set as well as a pre-fixed price for every token.
Fixed supply and dynamic price: The number of tokens is determined, but the price depends on how much money the project is trying to raise.
Fixed price and dynamic supply: Again, the price is fixed, but the supply of tokens shall vary based on the funding being raised.
Why are ICOs Important? How do they Affect the Crypto Market?
Since the inception of Initial Coin Offerings, this has had an extremely influential effect on cryptocurrency. But what is an Initial Coin Offering before that? The Unraveling of Mystery in Coin Launches and Their Crypto Impact steps into the benefits and risks.
Benefits of an ICO
1. They make fundraising easier for startups compared to venture capital or even a bank loan. The internet enables projects to raise money from investors all over the world, free of geographical restrictions.
2. Support for Decentralized Ethos: Initial Coin Offering supports the decentralized ethos of cryptocurrency. They enable projects to circumvent traditional financial institutions. In this way, more authority is with the individual investors and contributors.
3. Huge Profits: Early investors in a successful Initial Coin Offering stand to gain big. Prices will explode after an ICO has closed and if the project has gained huge success in mainstream usage.
4. Funding of Innovative Project: Through Initial Coin Offering investor funding can be offered in support of groundbreaking technology or services which would otherwise go unrealized. It also draws attention to emerging trends in the crypto space.
The Risks Involved in ICOs
But all that appears to be positive is hiding risks, so investors don’t make proper decisions while investing in an ICO. Let’s take some chances against some possible downsides.
Scams and Fraud: Not all ICOs are legitimate. There are some with the initial intention of scamming investors. Most of these types of projects are not regulated; thus, which ones are trustworthy and which ones should not be is hard to tell.
Lack of Regulation: One coincidence of Initial Coin Offerings not falling under the same regulations as old security offerings is that there is no legal protection in place for investors. This lack of regulation may lead to market manipulation or foul play.
Volatility: In general, cryptocurrency markets are known for extreme volatility. Even after an Initial Coin Offering has closed, prices of tokens can swing erratically, and there’s a chance that the investors may suffer heavy losses or huge gains.
No one knows whether the Initial Coin Offering project, once launched, will turn out to be a successful one. Even if an Initial Coin Offering manages to raise funds, a project can still fail to gain acceptance, face technical issues, or suffer from competition from other crypto projects.
Who can create an ICO?
Anyone can create an Initial Coin Offering. However, the US and other country’s regulators keep track of the ICOs so that they are properly registered. Even some promise to be registered or approved to mislead people. The process of launching an Initial Coin Offering is much simpler than that of most other funding strategies but can be used for scams as well. So if investors wish to issue one, first check if it’ll help their business since they might need to register with the SEC as well.
Catch New ICOs and Avoid Fraud
Initial Coin Offering activity declined sharply in 2019 due to uncertainty over the legal status of ICOs. While investors will be able to learn which Initial Coin Offerings to invest in, they will not be able to know which new ICO has come into existence. The website TopICOlist.com compares various ICOs. Investors can know which exchanges have registered which coins. Generally, these are safe ones to invest in because they only list vetted coins.
Cryptocurrency aggregators provide information about projects but don’t verify them. If a coin’s website has little information or strange language, it’s best to avoid it.
The SEC will act if the ICO happens to be illegal. As an example, Telegram was asked to return $1.2 billion in 2020 back to its investors. In order not to become a victim of fraud, make sure the project has well-defined objectives, full transparency over the project, and a white paper that elaborates on the project in depth. Keep checking the terms and conditions of the ICO, as well as exercise extreme caution over investments, such as buying other coins to invest.
Impact across the Globe on Crypto
Apart from the direct impact ICOs make on projects directly, Uncover the Secrets of Coin Launches and Their Crypto Impact further explores the impact that ICOs have had on the crypto market at large.
1. Going Mainstream and Adoption: The very idea of the ICO has made cryptocurrency mainstream. It has given almost any individual a chance to invest in new technologies, all through ICO. To this extent, the concept has much to do with the growing interest in blockchain and digital assets. It also created more regulation concerning cryptos in most countries as the governments try to protect the investors.
2. A New Class of Investor: The ICO has created a new class of investors commonly termed the “crypto enthusiast” or “token investor.” Often more technically astute and more willing to absorb higher risks in pursuit of potential rewards, this kind of investor has democratized access to investment opportunities while creating a new frontier in the world of financial speculation.
Conclusion: ICOs are a new source of fundraising for companies that carry the risk of fraud and volatility. There is a need to do proper research on the project before one invests in it. It will always feature prominently in the future of blockchain as the crypto world evolves.
Also Read:Crypto Custody Solutions: The Key To Protecting Investors Digital Wealth
