ICO stands for Initial Coin Offering also referred to as ‘crowdsale’. An ICO is a new ideology used for crowdfunding projects in cryptocurrency industries. It is a type of fundraising means in which a company attracts investors by releasing its own digital currency in exchange for bitcoin as well as fiat money. It releases a certain number of crypto-token, sells those tokens to required peers in exchange of bitcoins. This results in capital for companies to fund the product development and the audience members get their ‘crypto tokens’ shares along with their ownership to it. The success of ICO began with their first project launch, Mastercoin. By selling the company’s own tokens in 2013, it managed to secure $5 million Bitcoin. This lead to a revolution that made other companies like Ethereum raise over $18 million in 2014 and Waves raise over $16 million in 2016.
Every ICO is unique that shows the whitepaper is to be checked before investing in an ICO to know what will be obtained in exchange for investing,what the project aims to achieve, etc. ICO is the most preferred method to launch crypto projects based on the product’s demand and the strong team working on it. The spectrum of possible crypto-tokens uses depends on the scope of the project. For eg; Ethereum is a platform where all kinds of decentralized applications are built. The company’s tokens (Ethers) are actively used to maintain the operation of apps that have already been built upon the platform. Storjcoins are tokens released by Storj.io which is a decentralized cloud storage startup, and when its main product is released the users can to spend Storjcoins on the storage space, in addition to trade.
To invest in almost any Initial Coin Offering, these steps are to be followed:
- Find an ICO: The first step is to pick an ICO of choice. This can be done by browsing cryptocurrency forums to see what’s new or use listing sites to see the latest projects.
- Explore their website: Next step is to find the offering’s website that you’re most likely to find a link/button to join the ICO. Click this and proceed.
- Fund: The last step is to select a currency with which you can purchase the tokens of the ICO. Then you can complete your participation by creating an account and sending the designated amount of the cryptocurrency to the fund’s address.
The main goal for every ICO member is to help fund a project that they consider interesting. The benefits for taking part in an ICO can include helping the company launch its product. There is also an opportunity for selling the tokens to make a profit after purchasing them. Crypto-tokens are sold at a fixed price when an ICO is released. This is done keeping faith in the team that develops the finished product. The tokens’ value becomes secured by a working product which leads to an increase in price after the project is launched. This makes the original backers sell their tokens for profits but profits cannot be taken for granted. ICO campaign may fail in some case but the investment are returned. Therefore a final product cannot be delivered and the price of tokens remains the same which is important risk that ICO participants may face.
The earliest ICO’s were with little rules or restrictions. Blockchain startup owners began imposing a number of self-imposed restrictions when they realized that without government regulations, it becomes their duty to ensure sufficient trust from the community and the sufficient inflow of contributions. Some of the imposed regulations are as follows:
1) Storing the contributions of the community members in escrow wallets. The owners need several private keys in order to access the funds stored in an escrow wallet. One of the keys is usually owned by a trusted third party.
2) Establishing a legal entity for the company and documenting a set of terms and conditions of the ICO.
Legality is one of the biggest concerns with ICOs. In a completely unregulated and highly unmonitored system, anonymous developers could quite literally ask others to fund their idea without any legal obligation to pay them back. As of now, ICOs are neither legal nor illegal. It is up to the parties themselves to make sure what they do won’t cause any trouble.
Some of the most defining characteristics of an ICO are:
1) Block chain technology: Initial Coin Offerings are related to block chain technology. ICO’s have been launching on their own websites for a lot of Block chain projects. As it’s not easy to attract a lot of people to your landing page on your own, this practice is sub-optimal. Hence people have started creating platforms, which aggregate ICO campaigns of different startups, much like Kickstarter or Indiegogo do for non-Blockchain-based projects. Some of these platforms such as Waves, ICONOMI, State of the Dapps (Ethereum-based) had to be funded through their own ICO’s.
2) Informal documentation: ICO’s aren’t regulated so developers have no legal obligation to provide accurate documentation or realistic statistics.
3) Less identification: Little to no identification is required on behalf of the investors or developers.
4) Tiered pricing: ICO’s often give out tokens based on a tiered pricing structure. Those who invest first get tokens at the most favorable prices.
5) Reserves, goals, and quotas: Normally, a small portion of the supply is reserved to act as funding for the project. The project sets a goal for funding and various quotas are set. these quotas are used mostly to change the price of a token or stop funding.
Difference in ICO and IPO
1) A share of ownership in the respective company is denoted by a company’s shares released during an IPO. This is not the case in an ICO. Crypto-tokens can be used for voting rights but mostly they are utilised as form of currency that can be send and exchanged to obtain other currencies.
2) IPO’s are heavily regulated by the government. A large amount of paperwork is required before releasing its shares. It can cause issues in case of non-compliance. Conversely, cryptocurrency crowdfunding is a new idea, largely affected by government regulation. any project can launch an ICO at any time with little requirements and anyone can invest from wherever possible.