For traditional companies, there are a few ways of going about raising funds necessary for development and expansion. A company can start small and grow as its profits allow, remaining beholden only to company owners but having to wait for funds to build up. Alternately, companies can look to outside investors for early support, providing them a quick influx of cash but typically coming with the trade-off of giving away a portion of ownership stake. Another method sees companies go public, earning funds from individual investors by selling shares through an Initial Public Offering (IPO).
An Initial Coin Offering (ICO) is the cryptocurrency space’s rough equivalent to an IPO in the mainstream investment world. ICOs act as fundraisers of sorts; a company looking to create a new coin, app, or service launches an ICO. Next, interested investors buy in to the offering, either with fiat currency or with preexisting digital tokens like ether. In exchange for their support, investors receive a new cryptocurrency token specific to the ICO. Investors hope that the token will perform exceptionally well into the future, providing them with a stellar return on investment. The company holding the ICO uses the investor funds as a means of furthering its goals, launching its product, or starting its digital currency. ICOs are used by startups to bypass the rigorous and regulated capital-raising process required by venture capitalists or banks.
BREAKING DOWN ‘Initial Coin Offering (ICO)’
This is the most basic definition of an ICO. However, there is much more to the trendy crowdfunding method than this. Indeed, just as ICOs have rapidly come to dominate attention in the cryptocurrency and blockchain industries, so too have they brought along challenges, risks, and unforeseen opportunities. Investors buy into ICOs in the hope of quick and powerful returns on their investments. The most successful ICOs over the past several years give investors reason to maintain this hope, as they have indeed produced tremendous returns. However, this investor enthusiasm also leads people astray. Because they are largely unregulated, ICOs have become a hub of frauds and scam artists, looking to prey on investors who are overzealous and underinformed.
Below, we’ll explore the ins and outs of ICOs, beginning with a thorough overview of the ICO process itself. We’ll examine some of the benefits of ICOs as well as some of the most successful ICOs in history and where investors can go to seek out new ICOs in which to take part. Finally, we’ll take a look at risks that investors take when they participate, in addition to criticisms of the ICO space.
The Basics of an ICO
When a cryptocurrency startup firm wants to raise money through an Initial Coin Offering (ICO), it usually creates a plan on a whitepaper which states what the project is about, what need(s) the project will fulfill upon completion, how much money is needed to undertake the venture, how much of the virtual tokens the pioneers of the project will keep for themselves, what type of money is accepted, and how long the ICO campaign will run for. During the ICO campaign, enthusiasts and supporters of the firm’s initiative buy some of the distributed cryptocoins with fiat or virtual currency. These coins are referred to as tokens and are similar to shares of a company sold to investors in an IPO-type transaction. If the money raised does not meet the minimum funds required by the firm, the money is returned to the backers and the ICO is deemed to be unsuccessful. If the funds requirements are met within the specified timeframe, the money raised is used to either initiate the new scheme or to complete it.
ICOs are similar to IPOs and crowdfunding. Like IPOs, a stake of the startup or company is sold to raise money for the entity’s operations during an ICO operation. However, while IPOs deal with investors, ICOs deal with supporters that are keen to invest in a new project much like a crowdfunding event. But ICOs differ from crowdfunding in that the backers of the former are motivated by a prospective return in their investments, while the funds raised in the latter campaign are basically donations. For these reasons, ICOs are referred to as crowdsales.
ICOs also retain at least three important structural differences from IPOs. First, ICOs are decentralized, with no single authority governing them. Second, ICOs are largely unregulated, meaning that government organizations like the U.S. Securities and Exchange Commission (SEC) do not oversee them. Finally, as a result of decentralization and a lack of regulation, ICOs are much freer in terms of structure than IPOs.