What are ICOs? Initial coin offerings, or ICOs, are formerly well-liked techniques of acquiring money for fledgling cryptocurrency businesses. While conducting an initial coin offering (ICO), a blockchain-based firm creates a specific number of its own native digital token and sells them to early investors, typically in exchange for other cryptocurrencies like bitcoin or ether.
Table of contents
• What is ICO in cryptocurrency?
• A History of ICOs
• How do ICOs work?
• What are ICO structures like?
• Is ICO just a type of crowdfunding?
• Why ICOs have become a popular method of raising money
• Risks of investing in ICOs
• ICOs vs. IPOs
• Conclusion
What is ICO in cryptocurrency?
ICOs, a form of digital crowdfunding, give startups the ability to not only raise money without giving up equity but also to build a community of users who are financially motivated to see the project through so their presale tokens appreciate in value.
Buyers can gain access to the service that the token grants as well as a rise in the token’s price if the platform is successful (big IF!). ICOs can also provide an easy funding mechanism and an innovative manner for entrepreneurs to acquire money.
After the tokens are listed, they can be sold on an exchange to realize these gains. Investors can also increase their wager on the project by purchasing additional tokens when they go on sale.
One of the first significant success stories utilizing this comparatively new form of fundraising tool was Ethereum’s ICO, which raised $15.5 million in 2014. On May 12, 2021, ETH hit an all-time high price of $4,382.73, providing investors with a 1,408,903% return on their investment.
ETH was initially auctioned in 50 million lots for $0.311 apiece. One of the most valuable cryptocurrencies at the moment, its technology has enabled a complete ecosystem of decentralized applications (dapps) to thrive.
ICOs are a form of digital crowdfunding that allow startups to raise money without giving up equity and build a community of users who are financially motivated to see the project through.
A History of ICOs
The procedure started in 2013 when software programmer J.R. Willet raised $600,000 by publishing a white paper for the token MasterCoin titled “The Second Bitcoin White Paper” (later rebranded as Omni Layer).
By the year 2014, seven projects had raised a total of $30 million. The biggest that year was Ethereum, which generated more than $18 million after creating 50 million ether and selling them to the general public.
2015 was a less active year. A total of $9 million was raised through seven sales, with Augur bringing in just over $5 million.
When 43 ICOs raised $256 million in 2016, including Waves, Iconomi, Golem, and Lisk, activity began to pick up. This included the infamous token sale of The DAO project, a self-sufficient investment vehicle that sought to promote the growth of the Ethereum ecosystem by enabling investors to choose which projects to fund.
Shortly after the sale raised a record $150 million, a hacker stole roughly $60 million worth of ether, which caused the project to fail and the Ethereum protocol to hard fork.
The DAO’s demise did not dampen the burgeoning enthusiasm for the emerging digital asset market, and in December the first fund specifically designed for token investing received sizeable financing from traditional venture capitalists.
ICOs reached a new high in 2017, thanks in part to new technological developments. Almost $5.4 billion was raised through 342 token issuances, propelling the idea to the forefront of blockchain innovation.
The enthusiasm was fueled by ICOs selling out in progressively shorter amounts of time, and as people rushed to “get in on the action,” project fundamentals lost importance to potential investors.
ICOs began in 2013 with J.R. Willet raising $600,000, and by 2016, 43 ICOs had raised $256 million. In 2017, almost $5.4 billion was raised through 342 token issuances.
How do ICOs work?
Similar to IPOs, ICOs allow businesses to raise capital, but in the form of cryptocurrencies. The quick roadmap for an ICO is shown below:
- A company reveals a new cryptocurrency project for which it requires funding.
- The organization releases a whitepaper that outlines the project’s goals, aspirations, and vision. The project’s development and team, as well as every other component of the project, are all covered in technical detail in the whitepaper. Additionally, it provides complete openness on the use of cash, upcoming plans, and rewards for investors. This is done to draw in investment. The entity may employ an investment bank to handle the technicalities, proceed with the marketing to raise awareness on social media, and get started on a public stock exchange listing, should it be a successful ICO.
- Investors give the entity their money in exchange for cryptocurrency tokens.
- The new money is invested in the new cryptocurrency project or are used to enhance an already existing one.
For instance, a company wishes to raise money for its newest NFT (non-fungible token) project, Entertained Gorilla Boat Shop, or EGBS (the name is a play on the Bored Ape Yacht Club), which runs the NFT on its blockchain using a native currency called Gorilla XP.
The organization takes part in an ICO and gives investors Gorilla XP in exchange for their money. The Gorilla XP can then be used by investors on the NFT blockchain or exchanged for other cryptocurrencies.
ICOs are similar to IPOs in that they allow businesses to raise capital in the form of cryptocurrencies. Investors give money in exchange for cryptocurrency tokens, which can be invested in the new project or used to enhance an existing one.
What are ICO structures like?
Businesses that participate in ICOs must also determine a key element: the structure. There are three types of ICO structures:
• Static Supply + Static Price: In this case, an entity sets a cap on the total supply of tokens, and the price at which each token is sold is fixed. With this structure, the entity has a set financial objective for the amount of capital it wants to raise.
• Static Supply + Dynamic Price: In this case, an entity has a set token supply with a changeable goal, which means that the price of each token is based on the total amount of money raised.
• Dynamic Supply + Static Price: In this scenario, an organization sets a fixed price on each token while not having a predetermined cap on the number of tokens sent to investors. Hence, based on the total amount of capital raised, the organization chooses the supply.
Is ICO just a type of crowdfunding?
Crowdfunding is a vague term for when members of the public and other investors contribute money to a project or cause without expecting anything in return. By the use of cryptocurrency tokens, ICOs offer opportunities for returns in the form of monetary profits.
Crowdsales, a new term for the act of investors participating in token sales with digital assets, are another name for ICOs. Since the tokens they get may have uses in the project or governance capabilities, ICO investors typically expect something in exchange for their investment, which links them to the cryptocurrency project.
Donors to crowdfunding projects typically contribute to a cause without being financially committed to the initiative. They receive no benefit from the money they send.
ICOs are a type of crowdfunding where members of the public and other investors contribute money to a project without expecting anything in return.
Why ICOs have gained popularity as a means of funding?
ICOs offer the following benefits:
• Speed: A token based on Ethereum, such as ERC-20, can theoretically be produced and distributed in a relatively brief period of time using just 100 lines of code.
• Liquidity: Tokens are offered for sale on a 24/7 worldwide market.
• No gatekeepers: ICOs can raise money directly from anyone worldwide who has a cryptocurrency wallet.
• Ownership: Unless clearly stated in the smart contract, tokens do not grant token holders ownership rights.
• Community: ICOs draw early adopters, who will support your success by uniting the early user base.
• Little red tape: Depending on the regulatory status of your token, the amount of paperwork and disclosure requirements may be minimal.
ICOs offer speed, liquidity, ownership, community, and little red tape, making them a popular way to raise money.
Risks of investing in ICOs
Although there are many benefits, ICOs are not without their challenges. The cryptocurrency market is fiercely competitive, and both regulators and the community will closely monitor your initiative. You may get a general idea of the effort required to execute a successful ICO from this article.
Each coin made available through an ICO is thought of as a high-risk investment. The market is currently inadequately regulated, there are numerous fake initial coins offers, and investors are unprotected in the event that an ICO fails or turns out to be false. According to a 2018 Satis research written for Bloomberg, at the time, it was estimated that roughly 80% of ICOs were fraudulent transactions.
If you want to participate in an ICO, it’s critical to include the following in your due diligence procedure:
• Examine the project’s crew to discover whether any members have a track record of building profitable enterprises. Team members should ideally include links to their social media profiles so that others can reach them.
• Examine the white paper and roadmap for the project to see how the desired product or service will operate and when specific features will go live.
• Verify whether any computer code has undergone a third-party audit. This will serve as a dependable indicator of how seriously a project regards security.Keep an eye out for mistakes on the website; they are typically the first sign that a website has been thrown up fast and carelessly and may indicate that it is a fraud.
Tokens are typically posted on cryptocurrency exchanges, especially those that have had profitable sales. When the coins are posted, new investors who missed the token offering can purchase them. A project’s token may experience high post-ICO demand if it has done a good job of marketing itself.
Yet, it has become normal practice to see ICO investors sell their discounted tokens on the market in order to get a quick return on their investment or for token values to significantly pump and dump.
Few tokens seldom had price increases following these kinds of sell-offs, which is a major factor in the declining popularity of ICOs today. More than 50% of ICO ventures failed to last longer than four months after launching, according to a 2018 survey. Below is a list of more than 2,400 “dead coins”—ICOs that were unsuccessful.
Investing in an Initial Coin Offering (ICO) is a high-risk investment due to under-regulation, scam ICOs, and no protection. To ensure a successful ICO, it is important to review the team, white paper, and roadmap, check if any computer code has been audited, and look for typos on the website.
ICOs vs. IPOs
ICOs offer native tokens in exchange for investments and accept Bitcoin as payment. In contrast, IPOs swap firm shares for fiat money.
Apart from this, the primary distinction is that ICOs operate under the principle of decentralization, which means they are not governed by any central authorities such as banks, governments, or other financial institutions.
Contrarily, IPOs are completely centralized investment vehicles that need to register with a regulatory authority in order to become legitimate public companies listed on the stock exchange.
While respectable cryptocurrency businesses release whitepapers alongside their ICOs, initial public offerings (IPOs) are required to file a legal document called a “prospectus,” which must meet strict disclosure guidelines and provide investors with full transparency.
This acts as the corporation’s formal legal notice of its intention to offer shares for sale to the general public. In order to aid potential investors in making an informed decision, the prospectus must also provide crucial information about the company, its guiding principles, and the intended use of proceeds for its anticipated IPO.
| ICO | IPO |
| Decentralized and unregulated | Centralized and regulated |
| Receives capital in the form of cryptocurrency, giving investors tokens in return | Receives funding in the form of fiat currency in exchange for company shares |
| Companies generally publish a whitepaper | Companies publish a prospectus |
Conclusion
For beginners, participating in an ICO can be a challenging procedure, especially when it’s challenging to determine a company’s legitimacy. Asking for someone’s money when you can’t promise a return is challenging.
