An Initial Coin Offering (ICO) in the digital currency environment is a sort of capital-raising exercise. An initial public offering (IPO) in the traditional financial world using cryptocurrencies can be viewed as an ICO.
However, this is not the most accurate comparison, as the two fundraising activities have some key distinctions. First and foremost, startups are using an ICO to increase capital.
ICOs’ primary benefit is that they prevent intermediaries from the capital-raising process and establish direct links between the business and investors. Furthermore, both parties’ interests are aligned.
History of ICOs
Perhaps the first ICO-distributed cryptocurrency was Ripple. Ripple Labs began developing the Ripple payment system at the beginning of 2013, creating about 100 billion XRP (Ripple) tokens. The establishment sold the token to fund the Ripple platform development.
Mastercoin pledged later in 2013 to build a layer on top of Bitcoin to perform smart contracts and as well tokenize Bitcoin transactions. The developer sold out some million Bitcoin Mastercoin tokens and earned about $1 million.
Many other cryptocurrencies were financed by ICO, such as Lisk, who sold their coins in early 2016 for about $5 million. But Ethereum is the most prominent. The Ethereum Foundation sold ETH for 0.0005 Bitcoin each in mid-2014. They received almost $20 million with this, which is already one of the biggest crowdfunding ever since and stands as the capital base for Ethereum’s development.
It opened the door to a fresh creation of Initial Coin Offering as Ethereum itself unleashed the strength of smart contracts.
Types of Initial Coin Offerings
Two kinds of Initial Coin Offerings are available:
1. Private ICO
Only a restricted amount of investors can engage in the process of the private Initial Coin Offer. Generally speaking, only certified investors (economic institutions and high net worth individuals) can engage in private ICOs, and a firm may choose to set a minimum quantity of investment with this type of ICO.
2. Public ICOs
This is a type of fund-raising aimed at the general public, the reason it has the public term in it. The public offering is a democratized investment type because nearly anyone can become an investor. However, private ICOs have become a more feasible alternative compared to public offerings owing to regulatory issues.
The increase in cryptocurrencies and as well blockchain technology has helped to increase ICOs’ popularity. In 2017, ICOs raised over $7 billion. The figure nearly doubled in 2018. Telegram, an instant messaging service provider, has run the biggest ICO to date. The UK-registered business raised more than $1.7 billion during the ICO.
How Does an ICO Work?
An Initial Coin Offering is a complex method requiring profound technology, finance, and law expertise. ICOs’ primary concept is to leverage the decentralized blockchain technology systems in fund-raising operations that align with different stakeholders’ interests. The ICO steps are listed as follows:
Step1: Identification of Investment Objectives
The intention of the company to raise capital is very paramount and the first issue to take care of. The company identifies its fundraising campaign targets and creates relevant materials for potential investors about the project.
Step 2: Token Development
The next stage in the ICO of the coin is to create tokens. In essence, the tokens are expressions in the blockchain of an asset or utility. The tokens can be traded. They must not be confused with this as the tokens are only a representation of existing cryptocurrencies.
In general, the tokens don’t provide an equity stake in a business as opposed to shares. Instead, most tokens provide their owners with some stake in a company, created products or services.
The tokens are developed using designated platforms for blockchain. The method of tokens development is comparatively easy because a firm is not needed to write software from scratch as in fresh cryptocurrency development. Instead, current blockchain platforms running existing cryptocurrencies; like Ethereum allow the tokens to be created with minor code changes.
Step 3: Promo Campaign
At about the same period, a company generally runs an advertising campaign to find potential investors. Note that campaigns are usually carried out online to give the widest reach of investors. However, several big internet platforms like Google and Facebook are presently banning ICO advertising.
Step 4: Initial Offering
They are given to investors after the tokens have been created. The offering can be organized in many stages. The company could then use the ICO proceeds to start a new service or product while the stakeholders can expect to use the tokens they have acquired to benefit from the product or service or wait for the value of the tokens to go up.
Who is Allowed to Run an ICO?
Anyone! There is almost no regulation or just very little in many countries, which means as long as you can get the tech set up you’re free to attempt to fund your currency.
However, big organizations, reputable groups, and institutions that are recognized by the general public are more favored to make a success with their ICO. For instance, Facebook is currently working on its own cryptocurrency called Libra. This is a globally accepted brand and it is quite easy for it to be accepted by the public.
Know that since ICOs are open to all, scams may be difficult to eliminate from the system.
This may work for you or it may cause you to get swindled. An ICO is one of the simplest to create as a scam. Since there is no regulation, there is nothing to stop someone from doing other work to make you believe they’ve got a great idea, and then get hold of your money for good.
This implies that if you’re set to get into an ICO you’ve been told about, make sure you do your homework. The first thing you need to do is make sure the ICO’s creators are real and liable. In the age of the internet, finding a stock photo and setting up a compelling website is far beyond simple, so it is essential to go the extra mile. Some factors to look for:
What is the history with crypto or blockchain of the product? If it seems they have nobody with appropriate knowledge that can be readily checked, it’s a very bad sign, run.
Celebrities and ICOs
You might want to take a closer look if you’ve seen your favorite performers and celebrities like Jamie Fox urge their supporters to invest in an ICO.
Centra, an ICO which generated $30 million at the end of 2017, was introduced by boxing great, Floyd Mayweather, Jr., and as well DJ Khaled, but several reports say that Centra was involved in a class-action lawsuit for supposedly selling unregistered bonds. Adverts regarding this ICO were pulled down from various media afterward.
How To Find Out ICOs That are Good?
Just make sure your homework is done because ICOs are scarcely controlled. When buying into an ICO, you need to be much more cautious than you would be. Read the white paper, investigate the members of the team, and ensure they have a cryptocurrency history.
You could also use reliable websites which selects only ICOs they have reviewed and found legitimate and promising. Although you should not have complete confidence in any website that offers a listing, it can be very helpful.
Ultimately, ICOs are an extremely new approach to raising cash, and without going to get screwed over, everyone is attempting to adapt to the new ways. If you believe you can get on a promising ICO, make sure you do your homework in advance. Cryptocurrency is about the high danger and high reward and there is no difference between ICOs.
How To Start an ICO
The most significant thing you need to do is ensure either you or groups are knowledgeable and engaged in cryptocurrency and blockchain. Even if someone can create an ICO, it just doesn’t imply everybody should. You ought to be capable of answering on-the-spot questions about every small detail about your ICO.
You must also ask yourself if you absolutely think that an ICO will benefit your company. What problem do you hope to solve and what concept have you in place that will benefit people?
If you’ve decided to move on, you should have a white paper, which is a document that should define precisely what currencies have never before been able to give, or how you’re going to create a concept better than anyone else. This document should be interactive, informative, and very, very comprehensive.
Like any company, by the close of the first section, you need to reach your buyer. Publish a detailed whitepaper. Ethereum’s white paper, for instance, clarifies what blockchain is and then moves on to explain how they plan to construct on Satoshi Nakamoto’s efforts and generate something interesting.
By the bottom of the very first page, they do all this. Now, must every single white paper have to include an unabridged blockchain history? Probably not, but it should be easy to understand by anyone who reads it.
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