The Initial Coin Offering (ICO) is a kind of capital-raising approach in the world of cryptocurrency and blockchain. Although, it works equivalent to an organisation’s Initial Public Offering (IPO), however, the key difference between IPO and ICO is that the latter uses cryptocurrency and is transacted digitally.
However, this is not only the exact comparison since several differences are there among these two fundraising activities. When it comes to an ICO, investors earn cryptocurrency by exchanging their funds. To get a deeper insight into this topic, keep reading.
What Do You Mean by Initial Coin Offering (ICO)?
The Initial Currency Offering or Initial Coin Offering (ICO) is a method of funding that uses crypto. In general, it is a form of crowdfunding that does not look for public investment. In case of an ICO, an amount of cryptocurrency is sold as ‘tokens’ or ‘coins’ to investors or speculators in the exchange for various other cryptocurrencies like Ethereum or Bitcoin.
Newly established organisations that deal with crypto utilise an ICO in order to collect funds from potential investors. This approach of raising funds provides double benefits to the organisation alongside assisting them to raise the preliminary funds as well as enabling them to form a user base based on their product. Thus, ICO provides a utility value to its buyers and inspires them to take part in the ecosystem of the company.
Investors taking part in ICO may either sell their crypto online or convert it into fiat currency. Since this ICO market is volatile, it can become risky for the investors taking part in them.
What Are the Types of Initial Coin Offerings?
Mentioned below are two main types of ICO which are dominant in the crypto market:
- Private ICO
Only some selected investors can avail the private initial coin offering. In general, this kind of approach is limited to rich institutional investors and high-net-worth persons. This activity produces a substantial amount of capital which boons top marketing opportunities for the organisation.
- Public ICO
Another type of Initial Coin Offering (ICO) is the Public ICO. In this kind of fundraising approach, organisations provide their tokens to the public as well as retail investors. This is why it is an independent method of crowdfunding that emphasises on increasing the user base of tokens successfully.
Owing to its proper regulations, private ICOs are considered even more worthwhile investments than public offerings. Typically, the company determines the entire amount they are willing to produce from a private ICO through various presentations, meetings, and conferences. In 2018, the Telegram messaging application unveiled a private ICO which turned the tide and raised beyond $1.7 Billion from experienced investors.
What Are the Merits of ICO?
The benefits of an Initial Coin Offering (ICO) are discussed below:
- Due to minimal rules and regulations, these are much more effective and easy ways of raising funds for companies.
- Maximum ICOs are open to any individual, organisation or cooperative. This is why an ICO has a comprehensive platform and is more accessible than various other investment options such as IPO.
- Participating in an ICO provides you with an initial benefit by which you can have a chance to buy these coins at less price and trade them in sound crypto exchanges once their value escalates.
- Making an investment in ICO can be highly profitable. So, if you go for the correct ICO that focuses on the market in-depth and stay invested it in the long-term, you can expect getting considerable returns.
What Are the Demerits of ICO?
Apart from advantages, there are several disadvantages of participating in ICO as stated below:
- Investors do not possess any previous record about these crypto coins. This is why you need to gather in-depth knowledge regarding the condition of crypto markets in order to get success.
- Cryptocurrencies do not possess any backing of an asset. This makes them volatile and feature high risk. There are manifold instances of start-ups where the value got eroded down the line and investors suffered huge losses.
- Since these offerings are not controlled by a governing body, it has become an arena for plenty of fraudulent activities. Here tricksters often flee with your money from which you cannot expect any return.
How Do ICOs Work?
In fact, the unique venture capital raising concept of ICO has become a popular way ahead for new-generation start-up companies by adopting the decentralised mechanism of blockchain technology. The companies issue and distribute tokens which are traded via cryptocurrency exchanges and can serve different functions, from allowing investors access to different services to providing them with company dividends.
- Defining Investment Objective
At first, the company defines the objective of fundraising, the target audience, and required amount of fund. This helps them in preparing the required documents like a prospectus to let prospective investors know about the background of the company, project, and scope of earning.
- Generation of Tokens
ICO tokens symbolise a part of an asset or value. The tokens are mutually interchangeable and tradeable on crypto exchanges. Instead of providing any stake in the company as general stocks or shares do, most tokens are generated to provide a share of the products or services of the company.
Generating tokens does not need the particular company to create codes from the beginning which is applicable while generating cryptocurrencies. Rather, the company utilises the existing cryptocurrencies like Bitcoin or Ethereum that are already accessible and popular in the blockchain landscape.
- Promotional Campaigning
Thereafter, the company initiates its promotion campaigning in order to draw potential investors. Typically, such campaigns are performed online to reach the largest number of investors. They are not legally allowed to promote on popular social platforms.
- Initial Offering
Once the tokens are generated and the promotional campaign is over, the company starts its initial offering to raise its required capital in a formula of multiple rounds. The company uses its pooled funds to introduce the product or services. On the other hand, investors need to wait for the value appreciation of the tokens and by trading them across cryptocurrency exchanges.
Steps to Buy Tokens from Initial Coin Offering (ICO)
An individual can easily purchase coins in ICO by following the steps as stated below:
Step 1: Visit the platform which is providing the initial coin offering.
Step 2: Enter your credentials and carry out the registration successfully.
Step 3: Transfer the necessary fiat or digital currency to the respective platform.
Step 4: Choose the exact number of tokens you are planning to purchase.
Step 5: Click on the 'Place Your Order’ option to complete your purchase.
Upon completion of all these steps successfully, the shares will be conveyed to your respective crypto wallets.
In a nutshell, an Initial coin offering (ICO) enables start-up businesses to influence the escalating popularity of cryptocurrencies among investors and pool venture capital through digital platforms. Similarly, as a potential investor, you can earn profits by trading your acquired tokens at the beginning and selling them once their price enhances. However, before investing, make sure to research diligently about the organisation to evaluate its authenticity and prospect.