In the world of cryptocurrency, initial coin offering (ICO) owns a valuable position. With ICO, investors can increase their capital through a quick process and network. Any company having potential investors of crypto is starting this way of raising their capital.
As the world is growing digital in several aspects, the mode of money is also changing into digital. This is what we are now into “digital currency.” Due to this, individuals and companies are becoming possible users, and different methods are emerging.
ICO is one of these methods developed for increasing the ways of investments and making money. It works through tokens (ICO tokens) and smart contracts, which we will discuss later. This industry has many advantages for new traders and start-ups to digitize their finances.
The main reason ICO is getting popular because it has shown results for many investors. However, it also has some risks as there is no regulation yet. You can buy tokens for use at any time after you have a contract with the company.
Moreover, the rise of cryptocurrencies and blockchain technology helps popularize ICO. In 2017, over 7 billion dollars of assets were raised through this way. This figure, however, doubled by the following year.
This post will focus on everything related to initial coin offering (ICO). In the end, you will be able to decide whether to go for ICO or not. Now, without any further delay, let’s start with what an ICO actually is.
What is ICO?
Initial coin offering is the leading source for buying cryptocurrencies such as Bitcoin by using a token. This method is used by companies to raise their funds in the blockchain and crypto line. In simple terms, it raises funds through cryptocurrencies in a decentralized network.
You can consider ICO as a form of cryptocurrency and could be a trading platform. In this platform, investors receive tokens in exchange for their financial investment in their business. It is a form of crowdfunding to create and sell a digital token for a fund-building project.
What is ICO Token? Basic Unit of ICO
ICO token is the basic unit of ICO schemes on which its whole functionality is based. The individuals or companies buy tokens for trading in the future or use them for buying products or services. If you want to purchase multiple tokens, you will have to invest accordingly to the token company.
The tokens bought are used for exchange among different currencies and have a fixed rate for a specific duration. Think of it like a government employee who gets a yearly increment. Similarly, the rate increases over time, and you can use tokens at that price.
During the token owning process, you will not become part of the company. So, you need a smart contract to create with the company.
What is an ICO Smart Contract?
ICO smart contract is an agreement between the token company and the investor buying the token. This agreement is made for a particular duration, and its value is kept fixed during that duration. After accomplishment of the contract, you can do exchanges among currencies.
One exciting thing about ICO smart contracts is that they are created on the blockchain to make it legal. They let you make transactions of your assets without the involvement of any third-party. In cryptocurrency networks, these are the main elements of use.
Types of Initial Coin Offering (ICO)
Before you go for creating a smart contract, you have to choose the type of your ICO. Once you have attained your smart contract, you will be the owner of any of these ICOs. So, ICO has two major known types:
- Private ICO
Private ICO allows very few investors to become its part. The investors are credible which includes financial institutions and individuals with colossal net-worth. The company will charge that participant with their minimum amount needed to be invested.
- Public ICO
Public ICO, as the name indicates, is focused on the general public to make their investments. It is a regularized form of investing as nearly anyone can spend here. In this case, you can invest a low to high range of amounts whatever you want.
In comparison to Public ICO, private ICO is growing more viable because of regulatory issues.
ICO vs. IPO: Are they Similar or Different?
There is always confusion between the initial coin offering (ICO) and initial public offering (IPO) we come across. ICO is different from IPO. Let’s compare the ICO and IPO to let you know the differences, though there is a similarity in mainstream investment.
- Security Concerns
Initial chain offering (ICO) was launched a few years ago. However, IPOs have been launched for decades, and many investors are involved in investing in it. As mentioned earlier, ICO is usually for beginners, while IPO is for well-settled companies.
Since we are talking about the security concerns of both methods, people will trust more on IPO due to its age. But ICO is also rising, and traders and companies are buying tokens for future use and benefits. If you are a beginner to cryptocurrencies, ICO is the best option for you.
Moreover, ICO has no profitable business record or positive reviews than IPO, which has a positive record. IPO holds a solid bank account for its users while ICO has no such involvement of a bank.
All in all, you have to invest irrespective of the platform age if you are a beginner investor. So, you can go for ICO in the beginning. But later on, when your business grows, and you make some money, switch to IPO.
- Requirements for Registration
Any activity you process online needs some basic requirements to be filled by the account holder. As ICO does not have a regulation or legal aspects (currently), you are not demanded to fill in several documents. All you have to perform is through an online process on the internet.
ICO’s project is for a short time frame and is like a white paper with no documentation on a standard procedure. You are just part of the ICO, but you have no track record of it. In some countries, it is thought to be illegal.
On the other hand, an IPO project needs a legal procedure, and you go through a lengthy procedure of filing requirements. To fulfill requirements for registration in IPO, you have to mention earning thresholds, track records, and much more. Every single step includes legal actions, and you have to hire lawyers and keep patience.
In the case of an IPO, you will also need a prospectus, which shows a legal declaration of its purpose for issuing shares to the public. It has essential information regarding the company and its future IPO to help investors make a versed decision.
- Requirements for Investors
The key issue for all investors is to consider how to invest their assets. Questions arise in their mind that wonder whether they have to fulfill additional documents for investment or not. Will they be stuck in any step of their process? So, we will clarify these issues.
For ICO, the process is quite simple, and you just have to work everything over the internet. You can invest by buying tokens of a specific company irrespective of the company you are living in. The only limitation is this process is that it is not allowed in the US.
If you want to invest in a company of your own country, IPO is the best option as it is the simplest way. But if you want to invest outside your country, you will have to make some legal documents. You can invest either directly, or a broker can help you out with all your steps.
- Profit for Investors
Another thing that we mentioned earlier is to remember that ICO does not give control of the project. Many ways are available for currency investors to receive future benefits, depending on the structure of ICO.
In this case, your token price is fixed, and you get the value written in the smart contract. Its price will be fixed for the signed duration and the next year; you may get a different price.
In the IPO system, you will have to acquire stocks to get ownership with the company on upcoming earnings. The company’s shareholders will get dividends as per the procedure of the company throughout the entire year. You can earn more by selling stock with increased value.
How Does an ICO Work?
The initial coin offering (ICO) is a complicated process, which needs an in-depth knowledge of technology, economics, and the law. The central concept of ICOs is strengthening the decentralized networks of blockchain in funds-raising projects.
Although ICO’s work is difficult to understand, we will try our best to let you grasp it. We are covering it in four simple steps given below:
Knowing the Investment Targets
Any ICO started by a company has the only aim of capital raising. For increasing fundraising campaigns, the company knows the targets. It builds related stuff regarding the company or project for investors. After this step, the company starts minting the tokens.
We have discussed the token in detail, and now we will focus on how they are created. But don’t intermix the value and position of tokens with cryptocurrencies among the digital assets. They are used to exchange crypto and are a modified form of using them as a digital currency.
The tokens are made through particular platforms in the blockchain. The tokens-making process is straightforward as a company does not want to write a new code from the very beginning and set a new currency.
So, they use the available blockchain platforms such as Bitcoin, Ethereum, etc., and operate them to produce the tokens with lesser code changes.
Simultaneously, a company typically goes through a promotion campaign to attract traders to make investments with it. Like digital marketing, every company runs an online campaign to reach as much audience as possible.
Note that, currently, various online platforms like Facebook and Google have banned ICO promotion. So, you will have to utilize other marketing strategies and platforms that allow you to advertise ICO.
Once the company creates the tokens, they are given to the investors. For structuring this offer, it goes through multiple rounds. The token company can later employ the returns from the ICO to start a brand-new product or service.
At the same time, the investors can anticipate using the received tokens to profit from this product or service or set to appreciate the tokens’ worth.
Advantages of ICO
Now, let’s enlighten the benefits of ICO for everyone who wants to invest. These are the clear advantages of attracting serious traders, individuals, or companies to use this method for finance purposes.
- Funds Rise Quickly
ICO lets you raise money significantly quicker than using the old and conventional routes of investment. It is fascinating to you or your company just at start-up as you will notice a big change in the capitals. It spares you fund-raising time and allows you to serve time in important stuff.
So, you can consider ICO as a perfect source for your company to move forward and invest in future tasks. This is the reason ICO draws lots of users in a concise time.
- Relatively Cheap Option
Another essential hallmark is that ICO is relatively cheap for beginners and expert traders. There are no steps in the ICO process that charge you extra. Unlike the traditional methods of financing, ICO does not charge settlement fees and transaction charges.
If you are raising funds through conventional sources, it is advised to switch to ICO. You can make much more here than any other method.
- Global Investment
As ICO is entirely an online source, it is accessible to possible investors irrespective of their country. Also, there are maximum possibilities that you will get an investor because anyone can invest.
Consequently, it is best for people living in countries with limited access to investing funds. You can invest in ICO regardless of the factors mentioned above.
- Instant Liquid Investments
In the traditional routes of finances and trading, repayment of funds may take several years. However, investments in an ICO get liquid instantly once a token is entered on an exchange. It forces many users to invest their money.
Instant liquidity ensures that your funds are refunded before you lose them. So, you can create the number of funds you want.
Disadvantages of ICO
Despite the advantages of ICO, there are also some opposing sides and risks of investing in ICO or its tokens. The effects of these negative aspects lessen the approach of investors to raise finance through an ICO.
- Funds and Upfront
ICO enables firms to raise funds upfront, and the particular amount they get is above the required one. As a result, you will need to spend more, reflecting that the platform is not performing well. It can help quickly diversify the attention of the investors and the traders.
When people invest in a company, they ensure their suitability through the products and services. For this purpose, they go through several steps and make the process so that investors believe in their team’s competency.
- No Regulation as White Paper
The company launching an IPO must provide a “white paper.” It will have to be mentioned that there will be an exchange between tokens and cryptocurrency. But in ICO, there is no standard regulation methodology, which can build the trust of users.
You may consider it like the information is overlooked, and you will not get any product from the company. As a result, you could lose your money after having ICO, and you may face failure.
- Fraud and Cybersecurity Risk
In the digital era, frauds and scams are at the highs. As an investor, you are susceptible to scams in virtual currencies. If ICO forms a lousy name, investors will not believe in them as a finance source.
On the internet, cryptocurrencies are also susceptive to cybersecurity risks. Hence, your ICO token providing company cannot ensure your safety.
Well! That’s all about “What is initial coin offering (ICO)” till now. ICO is a questionable fund-raising method to launch blockchain and cryptocurrency networks. In ICO, there is selling and distribution of tokens as a new crypto asset in the exchange of Bitcoin and Ethereum.
For beginner crypto traders, ICO is the best thing due to its simple process and affordability. Today, it is a doubtful fund-raising method for companies and investors. But it executes a full use of blockchain in open fund-raising at an unbelievable level.
If you are excited to invest in ICO and cryptocurrency, you have to prepare your mind for risks. ICO has no regulation in some countries, while working is started in others to develop rules. It is not accepted due to its new emergence in the new fund-raising addition in finance.
Not every ICO or fund-raising company is a fraud, and you can find the one that can bring change for you. Just do some research and read reviews about them to get the right and legitimate company. Best of Luck!