Initial Coin Offering is equivalent to an Initial Public Offering (IPO) in the crypto-space. However, anytime a crypto-project wants to unveil a new coin or a Decentralized app, they create an Initial Coin Offering to attract investors into their ecosystem.
What is Initial Coin Offering?
An Initial Coin Offering is a type of funding using cryptocurrencies. It is often in the form of crowdfunding or crowdsale.
However, investors can invest in this offering and receive a new cryptocurrency token offered by the company. The token is useful – more like a ticket or utility – to use the company’s products and services. ICOs, most times, represent a stake in the company.
Through ICOs, many companies have been able to raise funds to support their projects. Before a company would initiate an ICO, they would have to submit a whitepaper.
Through ICOs today, trillions have been raised. According to Coindesk, ICOs have raised $5.6 billion and $6.3 billion in 2017 and 2018.
With these stats, we can see why ICO is crucial and why many companies use it. This guide takes a look at Initial Coin Offering and its future.
How does Initial Coin Offering Work?
Today, Initial Coin Offering has been revolutionary, and it has been able to achieve many strides. Such as:
- Providing the easiest path by which decentralized app developers can get funds to support their projects.
- Offering anyone the ability to invest in a project they like just by purchasing the decentralized project’s tokens.
It is essential to know that ICOs started to gain public attention in 2014, and this was when Ethereum raised $4 million through its ICO, which led to a new dawn.
When a new company starts a project and wants to raise funds through its ICO, it needs to create a quality whitepaper that showcases everything about the project, the need the project will fulfill when it is completed, how much funds are required, and the type of money that is accepted, and the duration of the ICO campaign.
During the campaign, investors and enthusiasts who would like to invest in the project would have to buy the project’s tokens with cryptocurrency or fiat currency.
It is also essential to know that if the money raised doesn’t meet the required funds that the company needs, money would be returned to the investors and enthusiasts. Hence, the ICO will be deemed futile.
Investors looking to invest in an ICO should take a few steps. The first one is that they should familiarize themselves with the crypto space. Furthermore, investors should also buy tokens with pre-existing digital currencies. This means that an investor would need to have a crypto wallet already and have a wallet capable of storing any cryptocurrency.
If you are looking for the right ICOs to invest in, the best thing to do is to research new projects on the internet. ICOs typically have lots of hype around it, and there are many forums where you can discuss the ICO with like-minded investors. Some websites aggregate ICOs to allow investors to compare and contrast different ICOs online.
Before we go further in this guide, we would look at what tokens are in ICO.
What are tokens in ICO?
Many people say the word “Tokens” but do not really understand what they mean. However, it is tough to give an exact definition. Let’s provide a broad definition of this term.
A token can be defined as a representation of a particular project which has value. The token, in the project, can be staked, or give a voting right to owners. There is much usefulness of tokens in a particular project.
With that in mind, there is a big difference between a cryptocurrency coin and a token. Bitcoin and Ethereum are examples of crypto coins because they have value outside their ecosystem. On the other hand, tokens are fungible digital assets used as a medium of exchange within the issuing blockchain-based ecosystems. Examples of tokens include DAI, MKR, and so on.
According to the Securities and Exchange Commission (SEC), there are two types of tokens: Security Tokens and Utility Tokens.
Generally, securities are instruments distributed by a company, trust, or government to provide evidence of debt or the right to share earnings. Examples of securities include bonds, debentures, shares, etc. These securities are traded among investors. Security tokens serve as on-chain representations of real-world securities.
Utility tokens are tokens that are incorporated into an existing blockchain protocol. These tokens are like passcodes to access the products and services the protocol offers. Furthermore, utility tokens are not used for direct investment but payment of services within the protocol.
The Pros and Cons of ICO
ICO has many advantages. Let’s take a quick look at them:
- ICO gives new projects the chance to grow. We saw this in Ethereum after its ICO. Ethereum now has many DeFi projects created on it.
- Today, many centralized projects never really get to do their initial public offering due to the tasking and unnecessary paperwork involved. When it comes to blockchain projects, a good quality ICO whitepaper is only needed.
- ICO establishes a good relationship between projects and their community.
- Because ICO collected $5.6 billion and $6.3 billion in 2017 and 2018, it just shows the hype and exposure it brings to any project.
- ICO funding also offers huge returns for developers to create more innovative projects in the crypto-space.
- In the same vein, ICO also allows investors to invest in promising projects. It is essential to know that when Ethereum had its ICO, 1 Ether traded for 40 to 50 cents. As of now, they are trading at $1,200.
Even though ICO offers benefits, there are some disadvantages to it.
- It is an opportunity for scammers to scam people and get quick money. All the scammer needs to do is to create a fake whitepaper and add details that would seem as if the project is real.
- When you invest in an ICO, you aren’t really investing in the project but the project’s idea. Investment works based on speculations and the reliability of the team behind the project. You simply don’t know if the project will succeed or not.
- It is essential to keep in mind that more than 80 percent of startups fail. It is either the developers don’t create something spectacular or the product doesn’t work at the end of the day.
- During an ICO sale, there are instances where individuals – popularly known as Whales – use their financial power to pay exorbitantly high transaction fees so as not to wait in line during the sale.
- ICO is a very arduous event in the blockchain world. The main point is that blockchain isn’t that scalable to take such a laborious event.
There have been a couple of ICOs in the world today, but here are the best ones.
Ripple Labs created about 100 billion XRP-tokens to serve as a mechanism for payments in the Ripple network. Ripple’s XRP sold about around 5,000 Satoshi. However, the token’s value hasn’t moved in a clear direction due to the fact that it increases and decreases intermittently.
Mastercoin declared it will build a protocol on the Bitcoin blockchain network in 2013. At that time, the developers received about 10,000 BTC, which was worth $3.8 million at this time. Mastercoin gained more traction and value a few months later, and some investors experienced high returns.
There is no doubt that Ethereum is one of the most popular ICOs today. It is the biggest ICO ever made. Ethereum has a presale that amounted to $6 million ETH. Also, Ethereum Foundation collected around 31,500 bitcoin to become one of the biggest crowdfunding ever created. Individuals that invested in Ethereum at that time profited enormously.
EOS ICO started in 2017, and it was concluded in June 2018. It took one year for EOS to finish its token sale. But the platform broke records by amassing about $4.1 billion in its token sale. This is the biggest ICO of all time. Today, EOS plans to become the main platform for decentralized applications. Recently, the platform had a major setback due to some vulnerabilities – but the platform still has lots of prospects.
Telegram is one of the most popular messaging apps today. During its ICO, the platform raised $1.7 billion, which involves SAFT agreements. The private ICO had two sales of $850 million each.
The funds generated were used to create the Telegram Open Network (TON). The platform is planning to produce a scalable blockchain network that processes billions of transactions per second.
ICOs have been a widespread phenomenon for some time now, and this is due to their benefits. It will definitely be exciting to see how the future of ICO turns out, even as government regulations become stringent. But we hope these regulations won’t deter ICO from gaining more popularity in the future.