Understanding What An ICO Is

03 March 12:35

[TL; DR]

An Initial Coin Offering (ICO) is an event in which a company (mostly a startup) strives to obtain capital by selling a somewhat new cryptocurrency.

An ICO is a cryptocurrency’s version of the Initial Public Offering (IPO).

ICOs can turn out to be profitable or deceitful; there is no guarantee of success.

ICOs are unregulated, so investors need to exhibit vigilance and foresight when examining and financing them.

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Every company vies for more money-making opportunities.

One popular thing they do is to “offer” its shares on a stock market for interested public members to come forward to purchase. Such a process is called an Initial Public Offering (IPO).

An Initial Coin Offering (ICO) is cryptocurrency’s equivalent of the IPO.

This leads to the crux of the article - what does an ICO mean?

Meaning Of An ICO

An ICO is a process in which mostly startup companies seek to obtain capital by selling a relatively new cryptocurrency or some form of service, which investors buy hoping that the crypto in question increases in value.

These investors can buy into an ICO to acquire crypto tokens given by the company. These tokens can either be valuable to the pre-launched crypto or symbolize a portion of the company.

However, there is no absolute certainty that an ICO will lead to a successful launch of a cryptocurrency. Some ICOs have generated tremendous returns for their investors, while many others have turned out to be frauds or have failed woefully,

Just like every application of blockchain, ICOs eliminate mediators from the capital-raising procedure and establish direct contact between the company and potential investors. This is its most beneficial feature.

The world of ICO is a tech-meet-finance-meet-law industry. Applying knowledge from each field when setting up an ICO is essential, as it is a sophisticated endeavor.

An ICO leverages the beneficial features of blockchain technology to raise capital effectively for its coin.

But how does this process work?

How An ICO Works

This is a sequential list of how an ICO works.

Identification of investment targets
The main goal of an ICO is for the company to raise capital. Therefore, their first step is to identify the targets for their fundraising campaign and formulate related materials about the company or project for probable investors.

Generation of tokens
A token is a representation of an asset in the blockchain. They can either be fungible (tradeable) or non-fungible. They do not provide a capital stake in a company; instead, a stake in a product or service established by the company. They are developed using defined blockchain platforms.

Promotion campaign
As a company, promoting your ICO is essential to entice possible investors. They are usually performed online to accomplish the broadest investor reach. Yet, presently, many massive online platforms such as Facebook and Google prohibit the advertisement of ICOs.

Initial offering
The final step is to offer the tokens to investors. The offering may be structured in various rounds. The company can then employ the income from the ICO to launch a new product or service. At the same time, the investors can anticipate using the acquired tokens to profit from this product or service or wait for its value to increase.

Before any company can set up an ICO, they have to decide how to structure it, as ICOs exist in various forms. Some of which are:

• Static supply and fixed price: A company can establish a specific funding limit, which suggests that each token bought in the ICO has a preset price, and the whole token supply is fixed.
• Static supply and dynamic price: An ICO can possess a static collection of tokens and a dynamic funding goal. The implication is that the quantity of funds obtained in the ICO defines the overall price per token.
• Dynamic supply and fixed price: Some ICOs retain a dynamic token supply but a fixed price, which means that the quantity of funding obtained determines the collection.

In addition to structuring the ICO, the company creates a "white paper." It is an informative guide that provides details on a product it intends to offer, and it is also a promotional tool.

Contained in a whitepaper is; what a product entails, the need it is meant to fulfill, the amount it requires, the amount of tokens the founders will hold on to, the form of payment is acceptable, the duration of the ICO.

Anybody can launch an ICO, provided they have access to the requisite technology and funds needed. There are two ways (types) ICOs can be launched.

Types Of ICOs.

There are two major types of ICOs, as summarized below:

Private ICO
Only a finite number of investors can partake in the process in private initial coin offerings. Typically, only accredited investors (financial institutions and high net-worth people) can engage in private ICOs, and a company can select a minimum investment amount.

Public ICO
Public initial coin offerings are a type of crowdfunding that targets the public. The public offering is a democratized form of investing as practically anybody can become an investor.

Conclusion

An ICO is an essential activity for crypto (or blockchain) companies, especially startups.

It is a prominent advertising medium by which they can generate public and private interest in their coin to warrant investments.

For the investors, making an early investment in a crypto company is a smart move, mainly if the coin appreciates astronomically over time.

On the downside, ICOs are not 100% regulated by any reputable financial authority. And since anyone can organize such an event, there is no guarantee of the validity of an ICO.

There have been cases of high-profile fraudulent ICOs. Floyd Mayweather Jr, a boxing legend, and DJ Khaled, a musician, promoted Centra Tech sometime in 2017. It was eventually ruled out as a sham in court, and the two promoters had to settle privately with the authorities. Centra Tech owners were sentenced to 8 years in prison for their ICO fraud.

To determine how legit an ICO is, you must examine the white paper and the company. Having a solid understanding of cryptocurrency is also pertinent, as it will help with any decision.

Author: Valentine. A, Gate.io Researcher
This article represents only the researcher's views and does not constitute any investment suggestions.
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