The Initial Coin Offering (ICO) is a popular method of raising funds for startups that offer products and services usually related to cryptocurrency and blockchain. This means that an ICO is a way for a company to raise funds to develop a new project, usually a coin.
The term ICO is similar to the term IPO (Initial Public Offering), which is a traditional method in the financial world in which a company "goes public." However, when a company is said to trade publicly, it makes its stock options available to the general public so that anyone can buy shares of that company in the hope that the share they purchased will be worth more in the future.
Similarly, ICOs are a type of digital crowdfunding that allows startups to raise funds without giving up equity. Also, they build a community of enthusiastic users who want the project to succeed so that they can profit from their presale tokens.
The significant benefit of ICOs is that they eliminate intermediaries from the capital-raising process, allowing companies and investors to communicate directly. However, it is not as regulated as traditional fundraising methods because it is only popular among blockchain companies.
This practice isn't limited to just startups. For example, a reverse ICO, which functions similarly to a regular ICO, is sometimes used by established businesses. In this case, a company already has a product/service and wants to decentralize its ecosystem by issuing a token.
How ICOs Work?
Traditional startup companies raise money by finding investors who will fund their ambitions in exchange for a share of the company's equity. This can be difficult for both startups and investors as there are many proceedings to follow. However, there are no intermediaries in the world of cryptocurrency as everything takes place on the blockchain through ICO.
To demonstrate how an ICO works, let's consider an example: Imagine a startup with a brilliant idea for a candy payment system that connects candy lovers to various candy makers worldwide. Let us call it CandyCoin.
Typically, you could get funding for this idea using the traditional method by taking out a bank loan or reaching out to some large investment corporations.
However, with an ICO, you must create, say, 2,000 CandyCoins and reach out to all candy lovers worldwide to purchase them. They can buy with cryptocurrency (BTC, ETH, etc.) or fiat currency, depending on the mode of purchase. Also, you will consider the unit to be made available because if people love your candy system so much and there are demands for the project, then the value of those CandyCoins will rise over time.
Furthermore, you describe in writing how your CandyCoins will function and how investors will benefit from participating in the project. This information is mainly contained in the project's roadmap, referred to as a whitepaper.
Hence, the operation of an ICO can be broken down into four simple steps.
Identifying investment goals, objectives, and targets:
The purpose of every ICO is for the startup to raise funds. First, however, it is critical to define the project's objectives and investment targets. Next, the company chooses its fundraising campaign's targets. As a result, the company must clearly understand the type of investor it is seeking.
Token creation:
The next step is to create tokens soon after the project's goal has been defined. In the blockchain ledger, the token represents assets. Tokens are generated on specific blockchain platforms. Token creation is a relatively simple process because a company is not required to write code from scratch, as with creating a new cryptocurrency.
Instead, existing blockchain platforms that run existing cryptocurrencies, such as Ethereum, allow the tokens to be created with minor code changes.
However, unlike stocks, tokens do not typically provide an equity stake in a company. Instead, most tokens give their owners a stake in a company-created product or service.
Promotion campaign:
The company must conduct a promotional campaign to attract potential investors using the data obtained from the project's objectives and targeted investors. However, these campaigns are frequently carried out online to reach a larger audience of investors.
Initial coin offering:
Following the creation of the tokens, they are offered to investors interested in the ICO in a series of rounds. The company can then use the ICO proceeds to launch a new product or service, while investors can either use their tokens to benefit from the product/service or wait for the tokens to appreciate in value.
Type of ICOs:
Public ICOs
This is a more accessible form of capital raising, similar to crowdfunding. Because almost anyone can participate, public ICOs are a democratized form of investment.
Private ICOs:
This is where a small number of investors are involved in a project. Some projects set a minimum investment amount, limiting participation to only high-net-worth individuals and financial institutions.
Risk Associated with ICOs:
Investing in an initial coin offering (ICO) usually entails a high level of risk. It could also result in the total loss of the funds invested. Others include:
Liquidity Risk:
The ability to trade, cash in, or exchange the acquired token for a legal means of payment on a platform may be limited.
Project Success Not Guaranteed:
ICO projects are typically in the early stages of development, with mainly experimental business models. As a result, it's unclear whether the business concept will be profitable. Unfortunately, there is no assurance that the ICO will be financially successful or that the investment will increase in value.
Zero Regulation:
In most cases, ICOs are not regulated or supervised in any way. As a result, ICOs are frequently held in foreign countries and on the Internet. Unfortunately, this means legal enforcement may be wholly and significantly impossible.
Final Takeaway
We believe you now understand what ICOs are and how they work. ICOs are a method of reaching out to companies to raise funds for projects they are working on, typically related to blockchain. ICOs are how these companies raise funds and begin developing platforms based on cryptocurrency technology.
However, before purchasing tokens, you should conduct extensive design research, which is an essential aspect of any ICO. This includes reading a white paper, ensuring that an ICO provides real value, and conducting a thorough investigation into the team.
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