An initial coin offering (ICO is its acronym) is a blockchain crowdfunding mechanism that can raise money for an upcoming project and mint a new cryptocurrency. The ICO market was at its peak in 2017 and 2018 — but these days, there are other methods for token offerings that are popular among developers. Anyway, it exists and is still working, so it would be quite fruitful to understand the concept, and that’s our aim to reach in this article.
How does it work, and what for?
When a cryptocurrency project wants to gather money using an ICO mechanism, the developer’s first step is to define how they will structure it. There are several ways to structure an ICO:
Stable supply and price: a company can set a specific amount of money they need to launch the project, so each token sold in the ICO has a price, and the total token supply is determined.
Stable supply but dynamic price: An ICO scheme can have a stable supply of tokens and a dynamic, changing funding goal—this means that the amount of money received in the ICO influences the overall price for a token.
Dynamic supply but stable price: Some ICOs algorithms have an active token supply but a stable price, which means the amount of funding received dictates the supply.
All the ICOs are more or less the same, so they go through these stages:
- It starts with the company’s or developer’s aim to raise money. They define the goals for its fundraising campaign and create relevant content about the company or project for their potential investors.
- Then the creation of tokens takes place. The tokens represent an asset or utility in the blockchain. They are fungible and tradeable. Don’t mix up tokens with coins, and read our article on the related topic. Keep in mind that tokens can’t provide an opportunity to stake in a company. But maybe you could do that in a product or service itself.
The tokens are created on special blockchain platforms. The process of designing tokens is rather simple because there is no need to write the code, as in the creation of a new cryptocurrency. Existing cryptocurrencies such as Ethereum allow the designing of the tokens at their base.
- A company usually has a promotion campaign just to attract people potential investors. That’s interesting enough, a few powerful online platforms such as Facebook and Google blocked the advertising of ICOs.
- Minted tokens are finally offered to the investors.
Who can set an ICO up?
It's rather crucial that the project should be interesting to get support from people. It also should be determined how the launched cryptocurrency will fit into the project. Once you’re thinking about setting up a new project using ICO algorithm, you should follow some essential steps:
- Outline your project
- Define short- and long-term goals
- Do market research on other ICOs
- Make a website
- Provide a social media presence
- Start a marketing campaign
Initial Public Offering (IPO)
An initial public offering (or IPO) stands for offering shares of a private company to the public in a new stock issuance. It allows a company to raise money from public investors. This scheme also allows investors to participate in the offering.
IPOs sell securities and have much stricter regulations. A company that wants to conduct an IPO must confirm it with a local authority and approve it. The provided registration statement should include financial statements and potential risks involved.
One of the key advantages of an IPO is that the company gets access to investment from all investing people to raise funds. This makes sharing conversation much easier and expands the company’s presence and public image, which can help the company’s sales.
Increased transparency helps a company to receive more cost-effective credit borrowing terms than a private company. IPOs are considered to be more secure once they're regulated.
Pros and cons of ICO
- ICOs offer high potential profits if you make the right choice on crypto and guess if it's good and prospective or not. Since you're buying early, prices are often lower, and some ICOs offer tokens at discounted rates.
- ICOs are open to anyone. On the contrary, IPOs are usually restricted.
- It's a quick and simple way for start-ups to raise money.
- Opportunity to have an alternative asset not based on fiat currency.
- As such projects are always quite volatile, there's a risk that the token loses its value or ends up crashing.
- The lack of regulation leads to more scams. It's pretty difficult, especially for a beginner, to understand if the project is legitimate or it's a fake one.
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Be aware of scams
Thanks to ICO’s popularity and a lack of regulation, many scammers managed to get away with the money they raised through the mechanism.
They promised returns from virtual currencies that were unbelievably high. People hoped to get more money, but in fact, they lost what they had.
Do you remember the old but good due diligence process? If so:
- Review the project’s team and find out about their business experience. If team members give their social media accounts to contact them, that’s great.
- Have a look at the project’s white paper and roadmap to see how they are going to launch the projects and what their philosophy is.
- Check if any computer code has been audited by a third party. That means the project is serious about its security.
- Look at their website – if it looks weird and untidy with many misprints, it could be a red flag that it was made quickly, and the team doesn’t care a lot.
As for the worldwide regulations of an ICO, it differs. Chinese and South Korean governments prohibit ICOs, and Thai authorities did it on a temporary basis. The majority of European countries, the U.S.and Canada, are working on specific regulations to govern the conduct of ICOs.
The bottom line
The ICO mechanism is getting older but still could be used for new projects to skyrocket. It's a nice crowdfunding scheme to have your project promoted.
As for an investor, it's better to track news on various ICO projects, especially scammed ones, read articles on the topic, and get a better picture of how the whole process is built. They say forewarned forearmed, and that's quite a precise way of depicting investing tools.