Initial Coin Offering is popular way that crypto projects raise funds. Companies that need funds to create new coins, apps, or services launch ICOs. An IPO is meant to raise funds from investors, and this results in the distribution of shares of the company stock to investors. In ICOs, crypto companies raise funds through the sales of the coin or tokens.
Investors can purchase new cryptocurrency tokens issued by the company. These tokens have utility. Initial coin offerings need thorough research before investment because they are unregulated.
ICOs have gained huge popularity in the crypto industry. One of the reasons behind this, is their unregulated nature. They are mostly preferred by young startups in the industry as they have emerged as a new form of crowdfunding in the world of cryptocurrencies.
ICO has combined the crowdfunding aspect with distributed ledger technology. This facilitates entrepreneurial ventures as a shortcut to raise external finance by selling and issuing tokens from investors.
Working of ICO
Any crypto project that wants to raise the funds should decide earlier how they will structure the coin. Structuring an initial coin offering should include the following points.
Static supply and static price: The cryptocurrency project should decide before the supply and price of the token sold in the ICO. It simply means that there is a fixed price and amount of the token.
Static supply and dynamic price: In this the tokens supply is fixed or unchanged and the amount of funds received in the ICO decides the overall price of the tokens.
Dynamic supply and static price: Some ICOs have a dynamic token supply but the price of the token is fixed. This means that the amount of funding received regulates the supply.
What is the Role of White Papers in ICO
The whitepaper is the crucial analysis of the ICO that tells everything about the project, its future planning, project timeline, the team, technical aspects, and other key token information. It also includes the complete details of the project with current market data and its use cases.
The white paper of the project should include all the details regarding the project like the aim, technology, development strategy, and users if any. This in a way provides trust for users that the project will survive for a long time. It serves as a user guide to attract investors.
The white paper should include all the details about the new cryptocurrency and also about the launching company or cryptocurrency project. The paper should aim to explain the commercial, technical, and financial information about the currency. It is an in-depth report to educate the audience about the project.
This is a comprehensive document that outlines the technical and economic aspects of the particular new cryptocurrency. Its main aim is to influence the current customer or investor by building trust by providing detailed information about the project. The whitepaper is released as a part of an initial coin offering campaign which is crafted to encourage the investors.
How the Funds are Utilized in an ICO
The funds are returned to the investors if the amount raised is less than the requirement and the ICO is considered unsuccessful. On the other hand, if the funds raised are adequate, they are used to fulfill the goal of the project.
Who Can Launch an ICO
ICO is fully unregulated. This means anyone can launch an ICO in the U.S. This brings advantages and disadvantages. The advantage is that anyone who has access to proper technology is free to launch an ICO. The disadvantage is that it is the easiest to set up as a scam, as lack of regulation results in anyone making ICO and escaping with the money.
Tips for Buying into an ICO
Before buying an initial coin offering, conducting due diligence regarding it is essential. This includes assessing the legitimacy of ICO organizers. Whether they are real and accountable. Check their history with crypto and blockchain.
If the project doesn’t involve anyone with suitable and applicable experience then consider this as a sore point that should not be neglected. Hence, an independent search about the concept of the project, the utility of the token, and how realistic the roadmap objectives should be made.
Special Considerations
A decline in ICO activity was seen in 2019 due to the legal uncertainty in ICO. Investors can research and decide on participation but there is no safe way to stay away from the scams and fraud.
Regulatory interventions, such as the SEC’s actions can be made regarding any ICO. In 2018 and 2019, the SEC filed an emergency action regarding Telegram ICO which raised $1.7 Billion. The Security and Exchange Commission (SEC) obtained the restraining order and cited illegal activity on the part of the development team.
Hence, it is very necessary to consider the terms and conditions of any ICO and also ensure that the ICO funds should be stored in an escrow wallet. This type of wallet needs several access keys which are needed for protection against the scams.
How is ICO Hype Created?
ICO hype is created on many sites online where investors discuss new opportunities. Celebrities and influential personalities encourage their followers or fans to invest in certain ICOs. However, the SEC warns investors that it is illegal to promote any ICO without declaring the compensation amount they received.
Influencer endorsements are made but they have associated risks with it. So, thorough research is a must.
Differences Between ICOs and IPOs
IPOs raise money for companies, attracting investors which results in the distribution of shares of the company’s stock to investors. On the other hand, ICOs raise funds through the sale of coins or tokens.
IPOs are funded by investors that anticipate the financial return while ICO investors should be risk tolerant as they are investing in new cryptocurrency.
In both the offerings, investors are sure that the new cryptocurrency project or the company is going to increase with time.
The main difference between an ICO and an IPO is that investing in an ICO does not secure the ownership stake in the cryptocurrency project. Rather, investments in ICOs are risky as the currency is worthless and there is no surety that it will increase in value
Examples of ICOs
Ethereum, the second biggest cryptocurrency in terms of market capitalization, launched its ICO in 2014. It raised $18 Million over 42 days. In 2015, the cryptocurrency project Neo’s first phase of ICO ended in 2015 and the the second phase ended in September 2016, gathering $4.5 Million. In March 2018, Dragon Coin raised about $320 Million.
SEC’s first crack down on an ICO occurred on December 11, 2017, and halted the ICO citing the reason that Munchee was trying to raise money to create a new cryptocurrency that would work within the app to order the food.
Andrew is a blockchain developer who developed his interest in cryptocurrencies while his post-graduation. He is a keen observer of details and shares his passion for writing along with being a developer. His backend knowledge about blockchain helps him give a unique perspective to his writing
Source: https://www.thecoinrepublic.com/2023/11/10/initial-coin-offering-what-is-it-know-all-the-details/