INITIAL COIN OFFERING
What is an Initial Coin Offering (ICO)?
An initial coin offering (ICO) is the cryptocurrency market’s equivalent to an initial public offering (IPO) in the stock market.
An ICO is usually happening when a company wants to raise funds in order to build a coin, an app, or a service. Investors who are interested in ICOs can buy into the offering and receive the token issued by the company. The cryptocurrency token could be a utility token that has a use or it can simply represent a stake in the company.
Read more about utility tokens here.
How does an ICO work?
When a cryptocurrency startup wants to raise money through an ICO it needs to have a whitepaper that describes in-depth what the project is about, what strategies will be used, how much money is needed to keep the project running, how many coins the team is keeping, how long is the ICO campaign for etc.
A whitepaper is what will attract more investors to the scene and what will make them believe in the project in order to invest their fiat in exchange for the promising coin.
FACT: Did you know that the Securities and Exchange Commission (SEC) can intervene in an ICO even though it is not regulated? For example, the maker of Telegram raised $1.7 billion in an ICO in 2018 and 2019, but the SEC filed an emergency action and obtained a temporary restraining order due to alleged illegal activity on the part of the development team. As a result, the U.S. District Court for the Southern District of New York issued a preliminary injunction in 2020 and Telegram had to return $1.2 billion to investors and pay a civil penalty of $18.5 million.
What are the advantages of an ICO?
Early investors in ICOs usually enter because of the high reward that gives them hope that is worth risking their money. If an ICO turns out to be successful after it launched the value of the coins the investor purchased before will climb above the price set during the ICO price and the gains can be huge. This is what motivates investors in ICOs: the risk reward ration turns out to be worth the risk if successful.
Now all of you are wondering how huge the gains can be. Well, there is no question that cryptocurrencies and specifically ICOs have turned investors into millionaires.
In 2017 alone, 435 successful ICOs took place raising in total $5.6 billion. Here is a list of the 5 biggest ICO fundraises of 2017:
Cryptocurrency | Amount raised | What is does? |
1.Filecoin | $257 million | Blockchain-based data storage.
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2.Tezos | $232 million | A new blockchain aiming to be more reliable than bitcoin or Ethereum. |
3.Sirin Labs | $157 million | Sirin Labs has been developing the first blockchain smartphone.
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4. Bancor Protocol | $153 million | Decentralized liquidity technology for Ethereum. |
5. Polkadot | $145 million | Technology allowing people to use multiple blockchains at the same time. |
Investors that buy into ICOs are hoping for the exact same reason. A quick overnight millionaire luck.
What are the disadvantages of an ICO?
Firstly, it is important that you all understand how easy it is for a company to launch an ICO to create tokens. What does that mean? Tokens do not have an intrinsic value or legal guarantees. There are actually online services that allow for the generation of cryptocurrency tokens in a matter of seconds.
Because of the lack of regulations, ICOs can also turn out to be scams. This is why in every situation investor should only invest an amount that they can afford to lose, a decent risk-reward ratio.
Since the Securities and Exchange Commission (SEC) or other financial authorities are not involved in their operation, funds that are lost will never be recovered.
However, people who do invest in cryptocurrencies in early stages know that they will either lose money or make a lot of money. In fact, this is actually what many investors are seeking these days. They are looking for a coin that was just created and is very cheap so they can be early investors and enjoy the coin’s upside movements if proved to be successful.
Initial Coin Offering (ICO) Vs. Initial Public Offering (IPO)
IPOs deal solely with investors, while ICOs may also deal with supporters that are willing to invest and support the project’s future.
The main differences between the two are:
- ICOs are not regulated or supervised by a government organization such as SEC.
- Due to the decentralized blockchain structure they all follow, it is much freer in terms of complying or structuring their ICOs. For example, companies that plan to go public need to comply with a couple of terms in order to be publicly available for trading on NYSE, NASDAQ etc.
ICOs can be structured in many different ways. They can decide to set a goal for its funding which means that each token sold in the pre-sale has a pre-set price and that the total token supply is static. This means that the distribution of tokens will be dependent upon funds from investors (the more funds received in the ICO the higher the token price will be).
How can you join an ICO?
There is no specific for staying up to date with the latest ICOs, therefore, the best thing an investor can do is to read online and try to find ICOs through social channels. ICOs can create a lot of hype and there are many forums where investors can connect and discuss with each other new projects. There are dedicated sites that publish ICOs but there also numerous forums on Reddit that investors can go and read.
