What is an ‘Initial Coin Offering'(ICO)?
For traditional companies, there are a few ways of going about raising funds necessary for development and expansion. A company can start small and grow as its profits allow, remaining beholden only to company owners but having to wait for funds to build up. Alternately, companies can look to outside investors for early support, providing them a quick influx of cash but typically coming with the trade-off of giving away a portion of ownership stake. Another method sees companies go public, earning funds from individual investors by selling shares through an Initial Public Offering (IPO).
This is the most basic definition of an ICO. However, there is much more to the trendy crowdfunding method than this. Indeed, just as ICOs have rapidly come to dominate attention in the cryptocurrency and blockchain industries, so too have they brought along challenges, risks, and unforeseen opportunities. Investors buy into ICOs in the hope of quick and powerful returns on their investments.
The most successful ICOs over the past several years give investors reason to maintain this hope, as they have indeed produced tremendous returns. However, this investor enthusiasm also leads people astray. Because they are largely unregulated, ICOs have become a hub of frauds and scam artists, looking to prey on investors who are overzealous and under informed.
Below, we’ll explore the ins and outs of ICOs, beginning with a thorough overview of the ICO process itself. We’ll examine some of the benefits of ICOs as well as some of the most successful ICOs in history and where investors can go to seek out new ICOs in which to take part. Finally, we’ll take a look at risks that investors take when they participate, in addition to criticisms of the ICO space.
When a cryptocurrency startup firm wants to raise money through an Initial Coin Offering (ICO), it usually creates a plan on a whitepaper which states what the project is about, what need(s) the project will fulfill upon completion, how much money is needed to undertake the venture, how much of the virtual tokens the pioneers of the project will keep for themselves, what type of money is accepted, and how long the ICO campaign will run for. During the ICO campaign, enthusiasts and supporters of the firm’s initiative buy some of the distributed cryptocoins with fiat or virtual currency.
These coins are referred to as tokens and are similar to shares of a company sold to investors in an IPO-type transaction. If the money raised does not meet the minimum funds required by the firm, the money is returned to the backers and the ICO is deemed to be unsuccessful. If the funds requirements are met within the specified time frame, the money raised is used to either initiate the new scheme or to complete it.