If you have been in the cryptocurrency market for a while, you must have heard the buzz around the word Initial Coin Offering during your venture. Yes, ICOs are changing the way in which startup companies raise funds and we are here to walk you through what exactly this phenomenon is.
What is An Initial Coin Offering?
An Initial Coin Offering, also known as ICO, is a crowdfunding mechanism in which early stage companies sell their own original crypto tokens in exchange for cryptocurrencies like Bitcoin (BTC) or Ethereum (ETH).
ICO is similar to IPO in concept, as both are a process to raise capital for startups although; investing in an ICO does not result in you getting an ownership stake of the company you are investing in. In simpler words, you are betting that the insignificant cryptocurrency you have purchased will increase in value later on and give you monetary profit. Individuals and startup companies can use the assistance of a crypto portfolio tracker to keep the token price in check.
Despite the fact that traditionally startups raise funds by the aid of venture capitalists, the development of raising funds through ICOs has been remarkable. Venture capitalists are known to hold up investor money for long periods of time whereas, ICO tokens are far more fluid and traded within short time spans due to their pre-assigned trade value. Unlike venture capitalists, ICOs do not require bulky masses of documentation and unjustified demands to be fulfilled.
What are Tokens?
During an Initial Coin Offering event, tokens are offered to investors. These tokens can also be referred to as crypto coins.
This is one of the simplest and most effective methods for startups and individuals to raise funds for their projects and for cryptocurrency users to invest in projects they see worth in. These events usually last for a period of one week or more, unlike IPOs which are normally just a one-time event.
ICOs have been circulating the cryptocurrency market since 2013 and are commonly used to fund the development of newly issued digital currencies.
History of ICO
Numerous projects applied the crowdfunding mechanism in an attempt to fund their projects back in 2013. The first being Ripple that sold 1 billion pre-mined XRP tokens to investors in exchange for real currencies or bitcoin. Later on, Ethereum managed to raise over $18 million in 2014 which was the largest ICO ever at that time.
Here we have outlined some of the most well-known, successful and early ICOs. However, these are certainly not limited to the ones mentioned below.
- Ethereum (ETHER-ETH): $18.5m raised in capital. Investors paid $0.4 per Ether during ICO,in 2014.
- Maidsafe Coin (MAID): Raised $7m within a matter of 5 hours, which had been a record time for most funds raised in such a short period of time.
- Golem Project: $8.6m raised in just a few hours. The company’s aim was to construct a peer-to-peer global computer network with blockchain data handling payments in GNT tokens.
- ICONOMI (ICN): $9.1m in capital raised.
Who Can Launch an ICO?
Anyone can launch an ICO!
At present there is little regulation on ICOs in the US so, any person can launch an ICO which also means that this can work either in your favor or disfavor since there are no certain rules and there is nothing to stop scams from happening. You might believe someone has got a great idea but eventually they might skedaddle with your money.
ICOs are launched by the dozen every month and each token offers innovative and unique ways to associate the application with the coin which leverages smart contracts to insert more features to these coins.
This new trend is dripping with potential as it enables every company and individual to effortlessly distribute tokens for free to raise money. It gives us the ability to rewrite the financial system as it is not just money that is decentralized but also the stock creation and trade as well.
Pros and cons of ICO for investors to consider:
PROS
- Regardless of the figure of ICOs being launched into the market every month, the success rate has been extraordinarily successful, having raised decent amount of capital through ICOs. Some have been lucky enough to earn a spot in the top cryptocurrency list in the cryptocurrency market.
- The high Return on Investment tale provides a definite opportunity for those on the hunt for capital.
- The liquidity of ICO tokens is a major advantage for startups since investor money is not being tied down for long periods of time and investors have the freedom to convert their tokens into any cryptocurrency of their choice. They can cash in or out at any time.
- While IPOs and venture capitalists charge a high fee, ICOs require no such things.
CONS
- Many projects have failed for being similar or have failed to reach expected levels which has driven the value of tokens to fall to as low as zero.
- If not cautious and well-guarded, investors become open to Ponzi schemes and more. Risk rate is very high in ICOs.
- While the chances of high return on investment are good, there are several cases where investors have lost their money as a result of scam and fraudulent projects. Be aware that lost money is highly unlikely to be recovered.
The Bottom Line
In spite of ICOs being a rather fresh topic, it has quickly gained dominance within the blockchain community. While many view ICO projects as unregulated insurances that allow entrepreneurs and individuals to raise the unwarranted amount of funds, others interpret it as an innovation that has the potential to entirely change the traditional financial system.
Ultimately, ICOs are an easy and rather quick way of raising money and everyone is trying hard to get a hang of it. If you are planning of making millions on a promising new token, be sure to do your thorough initial research before diving in. Though cryptocurrencies give high returns there are chances of high risks as well due to their volatile nature and ICOs are no exception in this case.
