What is an initial coin offering (ICO)?

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What is an ICO?

An Initial Coin Offering (ICO) is a way to raise and collect investments for cryptocurrency-related projects. In an ICO, a team creates its blockchain-based tokens to then distribute them to early investors. The initial coin offering acts as crowdfunding: users receive tokens they can use (immediately or in the future), and the project receives development funding.
This model became popular in 2014, when it was used to fund the development of the Ethereum network. Since then, hundreds of projects have resorted to ICOs (especially during the boom in 2017) with varying degrees of success. Although the name of such crowdfunding resembles an initial public offering (IPO), the two methods are very different ways of raising funding.

IPOs are usually applied to established businesses that sell their shares, providing for partial ownership of the company, as a way to raise funds. In turn, ICOs are used as a fundraising mechanism that allows companies to raise investment for their project at the earliest stages. When investors in an ICO buy tokens, they are not acquiring an ownership stake in the company.

ICOs can be a viable alternative to traditional funding for tech startups. Often, new entrants struggle to get investments without any functioning product. In the world of blockchain technology, well-known firms rarely invest in projects that have just a whitepaper. Moreover, the lack of regulation of cryptocurrency prevents many investors from taking blockchain startups seriously.

This practice, however, does not only apply to startups. Some established companies prefer to launch a reverse ICO, which is functionally very similar to a conventional one. In this case, the business already has a product or service and offers tokens in order to decentralize its ecosystem. Alternatively, they can also use an ICO to attract a wider range of investors and capital to form a new blockchain-based product.

Differences between ICOs and IEOs

A primary coin offering is much like an initial exchange offer (IEO). The key difference between the two is that IEO is placed not only by the project team, but in partnership with a cryptocurrency exchange.

The partnership with the exchange gives users the opportunity to buy tokens directly on the exchange platform. This can be beneficial for all participants in the process. When a reputable exchange supports IEO, users can expect the project to be subjected to rigorous vetting. The team behind IEO benefits in the form of a lot of attention, and the exchange benefits at the expense of the success of the project itself.

How an ICO works

Initial coin offerings can be organized in different ways. Sometimes the project team has a functional blockchain that will evolve over the coming months and years. In this case, users can buy tokens that are sent immediately to their addresses on the blockchain.

If the project does not have its own blockchain, tokens are issued on an existing network with a good reputation (such as Ethereum). After the launch of a new chain, users will be able to exchange their tokens for new ones.

Most often, tokens are issued on a blockchain that supports smart contracts. Typically, the Ethereum network is used for this, as many solutions apply the ERC-20 token standard. There are now over 200,000 different Ethereum tokens, although not all of them started as ICOs.

In addition to Ethereum, there are other popular blockchains that can also be used for this purpose, such as: Waves, NEO, NEM or Stellar. Given the flexibility of these protocols, many organizations do not plan to migrate to another platform, preferring to continue operating within the current one. This approach allows them to leverage the network effect of the existing ecosystem and gives developers access to tools that have already been tried and tested.

The rules of the ICO are announced before the direct collection of investments. The team can determine the time of the offer or set a hardcap - a limit on the number of tokens sold. The project can also introduce a whitelist where users must register before participating in the ICO.

Users then send funds to a specified address; payments are mostly accepted in bitcoin and etherium due to their popularity. Buyers either provide a new address to receive the tokens, or the tokens are automatically sent to the address from which the payment was made.

Risks of conducting an ICO

The idea of a new high-yield token is tempting, but it always comes with risks. As with any cryptocurrency investment, there is no guarantee that you will get a positive return on investment (ROI).

Determining a project's viability is difficult because there are many factors to consider. Potential investors should conduct a due diligence and scrutinize the project they plan to invest in. This process involves a thorough fundamental analysis. Below we have provided a list of questions that may be helpful when looking for a prospective project, although there may, of course, be more:

• Is the project concept viable? What problem does it solve?
• What is the distribution of the total supply of assets?
• Does the project need a blockchain/token or can it function without it?
• Is the team credible? Do they have the right skills to make the project viable?

The most important rule is never invest more than you can afford to lose. The cryptocurrency markets are incredibly volatile, and there is a great risk that your assets will fall significantly in value.

Summary

ICOs have been extremely effective as a funding source for early stage projects. After the success of Ethereum's initial coin offering in 2014, many organizations were able to raise capital to develop new protocols and ecosystems.

An investor should always be aware of what he or she is investing money in, because there are no guarantees of income. Given the characteristics of cryptocurrencies, such investments are very risky, and if the project fails to provide a viable product in an unregulated industry, most investors are left helpless.

Keep your nose to the wind and know that Fortune, Luck and Success

will always favor you,

when you are with us!

Always yours C.J.

All the above is not financial advice, but only a subjective opinion of the author. If you doubt something, do your own research and double-check the information yourself.