What is an Initial Coin Offering (ICO)?

Last Updated : 15 Nov, 2022

An Initial Coin Offering (ICO) is a fresh way for businesses to generate funds using cryptocurrency. It is a way to launch a new coin by selling it to investors during a large period. For example, Coinbase is a crypto/fiat-based company that has recently launched its IPO(Initial Public Offering) i.e.; they are sharing some shares of their company in return for money and that money can be used to have fund some of their projects and anything else they need capital of. Just like Coinbase a coin or a token in the crypto world is called an ICO. A token creator can sell a bunch of digital tokens for a set price to get the token out into the market and raise capital for the creator or project.

Types of ICOs

There are two types of ICO:

Private ICOs: In this ICO only a selected number of investors are allowed to participate. Since only a selected number of participants are there and the company requires a lot of money these participants are big institutions and high-worth individuals and a company can choose a minimum investment amount.
Public ICOs: In this type of ICO everyone can participate and it is targeted at the general public, due to some regulatory concerns the private ICO is becoming a more viable option for the companies. Since the general public can participate in the ICOs companies set the money cheaper so that most public can buy and they can make a lot of money for their project.

Working of ICO

An ICO is a process that requires deep knowledge of the technology. The main idea behind the ICO is to raise capital for the investment from an investor to the companies. Additionally, for raising funds in ICO the project organizer first determines its structure of it. There are generally three types of structures of ICO:

Static Supply and Static Price: In this type, the number of tokens and their price are fixed.
Static supply and dynamic Price: In this type, the number of funds received in the ICO will determine the price of the token
Dynamic supply and static price: In this type, the amount received determines the supply of ICO.

The following are the steps explaining the working of ICO:

Investment targets: When a company launches ICO it embeds its currency value with a value and they find people interested in purchasing that value. When the company identifies the audience it creates relevant material about the company or project for potential investors.
Creation of Tokens: After finding the targeted audience they start the creation of tokens. These tokens are tradable and should not be mixed with cryptocurrencies. Tokens do not provide an equity stake in the company and they give their owner some stake in the company. Tokens are created on the blockchain platform. As the token is created on the existing blockchain the company does not write code from start they just run on existing cryptocurrencies to generate tokens.
Promotion Campaign: The company started a promotion to let the customer know about their ICO. These promotions are done in online mode, some institutions ban the promotion of ICO on their platform but still, there is a large potential platform that runs the promotional campaign for ICO.
Initial Offering: Tokens are offered to the investors and offers may be given in several rounds. The company can then use the proceeds from the ICO to launch a new product or service while the investor can expect to use the received token from the product and service for their benefit.

The startup initiates the process of ICO by establishing the blockchain and setting up protocols and rules at which ICO is announced. The species specifies the intention behind the launch of the ICO and after these, the creators will then check the final step to ensure the smooth running of the ICOs at the time of the launch. The creators will join the exchange and active or upcoming ICO can be found on the exchange. It is more or less similar to an IPO listing only there is less paperwork to be performed by the companies.

ICO vs IPO

When buying a stock that's participating in an IPO, one gets a certain amount of power within that company. Owning fractions of a portion of that company means that one can even vote if one holds enough shares. In the case of investing in an IPO one hopes that the project in which investing in will do well this means there should be doing a ton of research if one is putting in a decent amount of money. These IOPs are regulated by the governments and many three-letter agencies that surround them. Only established companies can raise IPO. It requires Stable Bank accounts and business records. It has a proper legal Format. Lawyers, and banks are involved

In the case of ICO, it doesn't even have a finished product which means there's an increased risk but some ICOs have projects that are working and testable products so that's something to think about when investing. An ICO is not regulated, nothing is stopping from getting the money taken and running off with and it creates a big problem in a lot of rug pool(Developer takes all the money and run away). Any startup or new entity can make ICO. It requires only a new idea. It does not have a legal format. It involves programmers and the internet.

IPO	ICO
Initial Public Offering(IPO) requires an open bank account which applies to security.	Initial Coin Offering(ICO) needs either an account with an exchange or a wallet to apply for offerings.
IPO is a traditional way where a private company raises funds under the eye of the government.	ICO is a new form of fundraising where blockchain enterprises raise public finance.
IPOs are strictly regulated by the respective country's regulatory bodies.	ICO have low regulations and low to moderate transparency except for security tokens
IPO gives security in shares which represent ownership rights of the investor.	Cryptocurrency utility tokens are issued except for the security token was taken as equity.
IPO requires a longer time to obtain funds from a company that creates a lot of due diligence.	Cryptocurrency takes a quick time and the security token takes comparatively more time.

How to Create ICO?

The steps to create an ICO are:

Whitepaper: It is a statistical explanation for what issue the coin or token will be solving and specifically how it is going to be different from other coins or tokens. Some of the issues want to cover in the white paper are a marketing plan what problem the coin solves how the coin is different. Specific code mechanisms of the coin developer fees including developer wallets and future spinning plans and the long-term goals.
Marketing: This is where it can get difficult especially since there have been so many influencer scams and rug pulls in the past ICOs have a ton of negative emotion around them. To launch a successful ICO there needs to get people to see the new coin and the problem that it solves and then get them to help fund it. Now many different ways can do this some of the most popular advertising methods are to advertise on different platforms specifically crypto platforms promote by different join groups
Sell on Platform: There are platforms out there that will allow collecting money for pre-sales and then those platforms will distribute the coin to everyone who bought them this way the investors don't have to trust just they can trust the third party platform so launching a coin is simple.

ICO Regulations

The regulation of ICO space is to increase the capitalization of the cryptocurrency market. The Russian Association of Crypto-Currency and Blockchain (RACB) initiated the process to make uniform standards for the companies in the ICOs. Now, there are no uniform standards for the ICOs, and no new institutions came forward to draw the line between the cryptocurrencies and the existing economic role and significance. But in the future governments will create favorable conditions for the ICOs to provide innovative activity, diverse business development, and income.

Advantages of ICO

Liquidity: Lack of cash is a frequent barrier for individuals searching for an investment. Many possibilities have been closed due to a lack of funding. Thus ICO provides much liquidity to investors.
Decentralized: Most ICO demand that the owner must be able to transfer money at the time of purchase. Many investors can contribute at any time or any moment in an ICO. Investing early is advantageous as the contributors pay less by avoiding premiums.
Easy Funding: It provides a process to raise funding easily, as anyone from any part of the world can participate in the process of investing. Thus fundraising in ICO is simple and the project gets the required money as per the need.
Online Marketing: Tokens are marketed online the internet to a large audience. Many buyers can learn about the ICO through the organization's website, forums, and many more.
Positive effect: The ICO model gives a push to the development of the decentralized applications as those applications require numerous users When an organization opens a public ICO for decentralized applications.
Fund quickly available: Companies can raise their funds without having major paperwork. This process is fast and funds are made quickly available which is easier to build a company at an earlier stage.
Traceability: All the transactions are made online and can be easily traced. If someone wants to do background research on it. All the plans for the coming months and year can be easily visible.
High liquidity: An ICO token has high liquidity i.e. it can be bought and sold easily. As they don't require any physical form to be exchanged and investors can keep a close eye on their investments.
High returns: Some ICO offers high returns they started from a low value but with time their value increases and these returns make ICOs more attractive

Disadvantages Of ICO

Due Diligence: There is no formal process to audit ICOs. Any Flaws in the white paper may not be discovered until significant amounts of money have already been invested. Some organization put a clause in their ICO terms that require contributors to accept the risk and project abandonment.
Volatility: The price of the token becomes huge or low within a few seconds. High price volatility gives high risk for token investors and could be reflected in their portfolios. Blockchain Technology is prone to various changes because ICOs are competing for the market, an investor can expect a rapid change in the prices making ICO very volatile in comparison to other Investing options.
Unlawful Activity: There is an increasing concern that ICO could be used to finance terrorist organizations or to fund criminal activities. Since cryptography hides the detail of the parties by their hash functions.
Conflict of Interest: Lack of skin in the game as founders do not carry any personal financial risk in the transaction. Allocation of tokens to founders without lock-up periods leads to misalignment of interests.
ICO scams: Many investors invest in ICO in a hope that they will quickly get back a high return. Some of the successful ICO gave a high return to the investors. But, ICO scams are not very well understood by the investor and they cause fund loss to the investor. ICO attract a lot of scammers, as there is less paperwork and it is easy to raise funds in ICO they take the advantage of it, and investors unable to identify these scammers get loss their money
Lack of clarity: It is not clear by most jurisdictions how to roll over profits on the amount raised. There is a lack of clarity in terms of regulations which include tax accounting and tax treatment.

Examples

Tezos: This raised $232 million through its ICO in July 2017 but it wasn't a complete success. It faces numerous delays in the token distributions thus unable to get the desired result from this ICO.
Ethereum: This ICO launched in the year 2014 the initial price was $0.31 and the raising closed at 18 million USD in just 42 days. This is the most valuable cryptocurrency ecosystem at the time. It provides a technology on which distributed applications can be made with the implementation of a smart contract
EOS: Launched in the year 2017 with an initial price of USD 0.925. This blockchain raised 185 million USD in just five days. It claims the alternative to the Ethereum network.
NEO: First officially came in 2015 and 2016 with an initial Token price of USD 0.032. This ICO also gives a massive return in the year 2016. A key reason for NEO's success is the support and confidence that it enjoys from some high-profile entities.

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Article Tags :

Finance

What is an Initial Coin Offering (ICO)?

Types of ICOs

Working of ICO

ICO vs IPO

How to Create ICO?

ICO Regulations

Advantages of ICO

Disadvantages Of ICO

Examples

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