An initial coin offering is a way to raise capital in the blockchain and cryptocurrency environment. Everyone knows that investing in cryptocurrencies is a serious deed, and everyone should understand there might be no gold rush. Its inventors started a marketing campaign (it is a pivotal component of the ICO) and invited everyone to buy tokens.
What is an Initial Coin Offering (ICO)?
The main reason for buying tokens from ICOs — the desire to sell the token in the future for a high value. With the tokens, you will be able to buy future company services or just sell coins. ICO is also very similar to IPO (an initial public offering). A stock initial public offering (“ IPO ”) is the regulatory oversight. Despite the fact that these two ways of raising money are quite similar, there are still some key differences between them. Startups usually use the help of an ICO to raise capital. Although ICOs aren’t regulated, the Securities and Exchange Commission (SEC) can intervene.
The most important advantage of initial coin offering is that they created direct relations between the investors and the company. It means they got rid of go-betweens that usually include commercial banks, investment banks, and pension funds. Additionally, the interests of both sides are aligned. To start using ICo technology, you will have to purchase a digital currency first and have a basic understanding of how to apply it correctly.
How does an initial coin offering (ICO) work?
To start to raise money through initial coin offerings, a cryptocurrency startup should draw up a document. This whitepaper of the company usually outlines what the project is about, how much money is needed, the amount of the virtual tokens the founders will be able to keep, the types of money accepted, and how long the ICO campaign will continue. In addition, it is a new and efficient means for carrying out financial transactions.
During the campaign, supporters of the project purchase a certain amount of the project’s tokens (called utility tokens) with fiat or digital currency. The ICO tokens are analogous to shares of any company that was sold to investors during an IPO. Each of the companies has pre-determined obligations to the investor. This part is rather similar to the usual stock exchange.
If it happens that the money earned doesn’t cover the required minimum of funds, the cash might be given back to the sponsors. In this case, the ICO would be considered a failure. But if the funding demands are met within the specified timeframe, the money raised is used to reach the goals of the project. The ICO technology can start a revolution in the field of corporate finance. But despite the fact that ICOs are rather popular and profitable, well-known social networks such as Facebook and Twitter banned ICO advertisements.
Types of initial coin offerings
There are two main types of ICOs:
1. Public ICO
Public initial coin offerings are a type of crowdfunding that aims at the general public. This form of offering is called public because everyone can become potential investors.
2. Private ICO
Speaking about private initial offerings, there is a limit of investors being able to take part in the process. It’s worth remembering that only accredited sponsors can participate in private ICOs. And it is a company that sets a minimum investment amount.
Nevertheless, according to the statistics, private ICOs are getting more and more prolific in comparison with public initial offerings.
The increase of the blockchain technology and cryptocurrency market helps to step up the popularity of ICOs. In 2017, $7 billion was earned with the help of ICOs. In 2018, this figured trebled.
Initial Coin Offering (ICO) vs. Initial Public Offering (IPO)
There are some ways for companies to earn money that is necessary for their expansion and development.
- Each company can start small and grow while its profits allow. In this case, they can owe money only to the owners of the company. But sometimes, it also means that they might have to wait a lot for funds to accumulate. As an option, startup companies can look for outside sponsors. They can provide them with quick cash. In return, companies will have to share a portion of the ownership stake with the investors. Another method is to go public, raising capital from individual investors by selling shares through an IPO.
- It’s worth saying that IPOs always deal with sponsors. ICOs, in their return, are in touch with supporters who have a real desire to invest their money in a new project. It is like a crowdfunding event. But still, we should distinguish between crowdfunding and ICOs because the backers of ICOs live in the hope of returning their investments, while the hard cash earned in crowdfunding campaigns are, in many cases, donations. And finally, stock exchanges and companies listed by IPO are heavily regulated by authorities. Also, you are able to get some benefits in the future according to the smart contract.
There are some more differences between these two ways of earning money.
- Firstly, governmental organizations do not control initial coin offerings. It means they are not regulated by anything and anyone.
- Secondly, due to their decentralization and absence of control, ICOs are much freer than IPOs.
An initial coin offering may be structured in a huge variety of ways.
- In most cases, companies set a limit for their findings. It means that every token that was sold in the ICO has a pre-set price.
- In other cases, there is a statical supply of ICO coins but a dynamic funding goal. It will also indicate the financial instrument to be sold during the ICO, normally coins.
- Nevertheless, others have a productive token supply which is defined by the amount of funding received. In such cases, the price of a token is stable, but the number of total tokens is unlimited.
Pros and cons of ICOs
It’s worth saying that there are no shares in an ICO. Instead of shares, companies earning money through ICO give a cryptocurrency token that is deemed to be a blockchain counterpart to a share. Usually, investors pay in ethereum or bitcoin. Then they get a commensurable amount of new coins in exchange. Every person using ISOs should be ready that his\her investment may be lost.ICO offers a way for an established business to raise funds through the ICO route of crowdsourcing.
You need to know how simple it is for a company to launch an ICO to invent tokens. There are a lot of online services that give an opportunity to generate crypto tokens in a matter of minutes. Investors and sponsors should remember about it while thinking about the differences between tokens and shares. Tokens do not have intrinsic value or legal guarantees. ICO managers generate tokens, receive them, and then hand them over by transmitting them to individual supporters.
Newbies in ICO operations tend to purchase tokens because they hope that the project won’t fall through after in launches. If the plan does work out, the value of the tokens they bought will rise.
Early investors in an ICO operation are usually motivated to buy tokens in the hope that the plan will succeed after it launches. If this actually happens, the value of the tokens they purchased will go up, and they will get the total profit. This is the main advantage of an ICO: the opportunity of high income.
By the way, a lot of people using ICOs have become millionaires. It renders that this way of earning money can be trusted. Tokens bought in ICOs returned an average of 12.8 times on the initial investment in dollar terms.
Are ICOs worth it?
As it was mentioned above, thanks to ICOs, a lot of people have become well-off. Most people trade cryptocurrencies through cryptocurrency exchanges. Unfortunately, nothing is that simple. Like all new products that appear in our life, ICOs have brought along risks, challenges and also jeopardize people’s investments. Many investors buy ICOs in the hopes of quick and powerful returns on their investments. However, this enthusiasm among supporters can also make people confused.
Since they are not controlled by anyone, ICOs are full of cons trying to take in inexperienced and unaware investors. And because of not being regulated by any authorities, money that is stolen may never be returned to the owner. The People’s Bank of China officially banned ICOs, naming them as counterproductive to the economic and financial stability of the country. The Chinese central bank forbade the use of tokens as currency and prohibited banks from offering services connected to ICOs. As a result, both bitcoin and ethereum prices went down, and many people started thinking that there came a sign of the future cryptocurrency regulation.
Regrettably, no one can be insured from being tricked, and the only thing any person can do is to show their vigilance. But there are some tips we want people to follow, and maybe they can not be taken in:
- You should completely understand what the aims of the project are. Make sure you do trust the developers with your money. Real successful ICOs always have a comprehensible, straightforward white paper with clearly outlined goals.
- Look over a white paper of a company attentively before deciding whether to invest. There must be legal terms and conditions included. Remember, it is up to an investor to ensure any ICO is legitimate.
- Know the developers of the project. Investors and other companies should intend for transparency from a company launching an ICO.
- Make sure that ICO funds are being placed in an escrow wallet. This is a wallet demanding multiple keys in order to get access. This is useful protection against cons, particularly when a neutral third party is a holder of one of the keys.
How to Join an Initial Coin Offering?
Today there are a lot of websites representing upcoming and current initial coin offerings. These sites are Cyber Fund, Reddit, and even Facebook.
Steps to take
- To become an investor, first of all, you need to decide what company or project launch is more profitable.
- Apart from it, you’d better perform your own research before making any investment informed decision.
- Read more and do research on the team members, and make sure they have a good history.
- Then you and any other person should create a cryptocurrency wallet while surfing the Net.
- Additionally, you have to know what ico smart contract is. It is a widespread way in the blockchain space for earning money for the project. Blockchain coins (ICOs) would necessarily be considered securities.
- Everyone should always be careful when choosing an ICO to invest in. It’s worth saying that the conditions of the smart contract cannot be altered.
- By the way, these smart contracts are unique for many reasons. Make sure you visit investor .gov for more resources before you invest.
- It’s worth noting that each and every ICO will have various requirements, although it is the easiest way of transmitting tokens upon payment by cryptos to the blockchain. This blockchain will show the newbies how to become part of the investment process.
For instance, a website called Blockchainhub recommends that before investing money, it is vital not to have any exchange or digital wallet. Supporters are always asked to export their private keys to another wallet to get access to their new coins and tokens. That is why it is important to make sure that the private keys of the wallet are storable.
The ease of the procedure
Companies have intended to make this process easier by providing accessible functioning wallets for their ICOs. In this case, the backer can “transport” his money directly to the wallet. The funds are exchanged for tokens according to the exchange rate at the time of purchase, with the tokens deposited into the wallet. Others remit the purchased tokens to the address from which the funds were sent.
At the same time, only a limited number of investors know that not every virtual wallet can be compatible with the tokens deposited into it. Consequently, users don’t see them after the purchase. So, it’s rather important to have a wallet that allows the transmission of private keys so that it is available to transfer the tokens to a new wallet.
It’s become far more comprehensible since the launch of Ethereum. This wallet is considered to be user-friendly, supporting multiple tokens, which make access to buy coins far simpler than ever before.
Speaking about due diligence, it is necessary to use it to avoid frauds and Ponzi schemes. In addition, ICORating provides supporters with a full analysis of the company or project. Also, the Securities and Exchange Commission (SEC) has warned investors to be aware of scammers and fraudulent ICOs. There is no guarantee that an investor won’t be on the losing end of a scam.
To sum everything up, we want to say that for now, initial coin offering (ICO) is a phenomenon, but tomorrow it could be another cautionary tale. It will refer to the integrity of the sector and the success of companies raising capital, mindful that not all will deliver, but at least a majority. The shift in focus away from the use of venture capitalists for fundraising has taken the market by storm. Cryptocurrency is all about high risk and high reward, and ICOs are no different. But if you read about it attentively, it can help you reduce the risks associated with investing in ICOs.
Are ICO illegal in the US?
On the one hand, a recent survey has revealed that cryptocurrency crowdsales are completely legal in the United States of America. What concerns other countries, for example, the governments of China and South Korea, prohibit ICOs. On the other hand, ICOs are full of risk and can jeopardize everything if done incorrectly. However, Securities laws will apply to an ICO as they do to an IPO. The rise of cryptocurrencies and blockchain technology is helping boost the popularity of ICOs.
How to set up initial coin offerings (ICOs)?
ICO is the process of crowdfunding a new cryptocurrency project involving a token trade. If you want to become one of the token holders, as has been mentioned above, first of all, you need to make a decision and choose what project seems more beneficial for you. After you have made up your mind, you should create a digital wallet your funds will be deposited into.
How many ICOs on Ethereum?
For the first time, the ICO sale was held by Mastercoin in July 2013. Ethereum raised the capital with a token sale in 2014, raising 3,700 BTC in its first 12 hours, equal to approximately $2.3 million, which had been the record for the most amount of capital raised in the shortest period of time. Ethereum is considered to be vital for the ICO space. It is because of the innovations with regard to dApps.
How to do an ICO on Ethereum?
- Come up with an idea, think it over, and make sure that your project actually needs an ICO.
- Research the legal side of things and find out if ICOs are legal in your country.
- Create an ICO token.
- Draw up white papers.
- Launch a website.
- Launch an initial coin offering.
If you follow these steps, you will create an ICO successfully!