Initial Coin Offering (ICO) in a nutshell
Uncover the basics of Initial Coin Offerings (ICOs) and learn what stands behind the controversy. What is their importance, how are they used and what are the alternatives?
Initial coin offerings (ICOs) have become a popular way for cryptocurrency and blockchain-based projects to raise funds. In an ICO, a project or company issues a new digital token or cryptocurrency to investors in exchange for traditional currency. This method of fundraising has been seen as a revolutionary new way to bypass traditional financial institutions and democratize investment opportunities.
- ICO is a method for crypto projects to raise capital by selling newly issued tokens to the investors
- Participating investors provide capital in crypto or fiat currency in exchange for tokens before they are traded publicly
- The process remains mostly unregulated and has often resulted in a loss of funds for investors
- Alternative solutions with higher security include IDOs and IEOs
However, the lack of regulation and oversight has also led to many fraudulent or unsuccessful ICOs, making it a controversial and heavily debated topic in the cryptocurrency community. In this post, we will explore the ins and outs of initial coin offerings, from why and how they are done to the security and regulation concerns around them, as well as their potential benefits and critiques.
The history of ICOs
In the year 2013 J. R. Willett spoke in the Bitcointalk forum proposing a new protocol to be built on top of Bitcoin, called MasterCoin. J.R. Willett accepted BTC donations in exchange for early ownership of some MasterCoins. The MasterCoin token held some benefits for people who were actually holding to incentivize further investors.
Just like that the first ICO was conducted. MasterCoin became a tremendous success and in its current form is serving as a base layer for the Tether protocol.
The famous Ethereum ICO came a year later in 2014 when young Vitalik Buterin proposed his revolutionary infrastructure platform. The ICO yielded over $18.3M, with the initial price of ETH being $0.31.
The biggest ICO ever conducted was by the blockchain project EOS, which raised approximately $4.1 billion during its year-long ICO campaign that ended in June 2018. Around that time also emerged a wave of small-cap ICOs, the majority of which ended up being fraudulent. Since then the focus has shifted to higher security crowdfunding mechanisms based on smart contracts, rather than trust.
Why are ICOs done?
ICOs are typically executed by crypto founding teams that seek capital to build or scale their product. ICOs emerged as an accessible way of raising such capital from the general public.
The investors participating will traditionally get newly issued tokens as compensation for investing. In traditional finance, crowdfunding would be a similar mechanism, with investors getting a product or service instead of tokens.
Often these newly issued tokens have a very limited utility and the only motivation for holding them is the upside potential. The idea is that buying in early in the project will result in increased price when the tokens are distributed to the open market and therefore profit to the investors.
The ICO process typically consists of several stages. First, the company or project will publish a whitepaper that outlines the goals, use cases, technical specifications, and terms of the ICO. The whitepaper is designed to provide potential investors with a clear understanding of the project and the expected return on investment.
Next, the company will set a date for the ICO and announce it to the public. Investors can participate in the ICO by sending crypto or a fiat currency to the company in exchange for the new digital tokens or cryptocurrency. Once the ICO is complete, the new tokens are distributed to the investors.
To make the process easier and more secure, ICOs often use intermediary platforms called launchpads. These platforms facilitate the interface between the project and investors. Investors have the option to purchase the token directly on the intermediary platform and they get some additional security features.
Some of the well-known launchpads include DuckStarter, Binance Launchpad, Polkastarter, DAO Maker, and Seedify. Although most of these would already be classified as IDOs or IEOs.
Security and regulation
The regulatory framework of ICOs varies depending on which part of the world it is conducted. In most places, ICOs still remain completely unregulated, resulting in many fraudulent offerings or otherwise unprofitable returns.
In the United States, the Securities and Exchange Commission (SEC) has labeled ICOs as a securities offering, granted it falls within specifies parameters. Many projects however seek to bend these parameters to stay out of the regulatory scope. There are also countries where ICOs have been banned completely, such as China.
In addition to government regulation, there are also efforts to improve the security of ICOs through technological means. Some blockchain projects, for example, have developed more secure and transparent systems for raising capital, such as IDO (Initial DEX offering) or IEO (Initial Exchange Offering).
These systems use smart contracts and other blockchain-based technologies to ensure that the funds raised are used as intended and that the distribution of tokens is fair and transparent.
Are initial coin offerings profitable?
They definitely provide a lot of upside potential, however, projects executing ICO are usually in a very early phase of development. Usually, in that phase, it is too early to tell if the project is going to be profitable. The majority of ICOs have yielded negative results for investors making them very risky and speculative.
What is the difference between ICO and IPO?
ICO (initial coin offering) and IPO (initial public offering) are similar capital raising mechanisms with IPO referring to the introduction of stock to the general public, while ICO is the introduction of cryptocurrency or token.
What is the difference between ICO and presale?
An ICO is a public offering of tokens or coins to the general public, while a presale is a private sale of tokens to a select group of investors before the public ICO. Presales are typically offered to high-net-worth investors, venture capitalists, and early supporters of the project.
What is the most successful ICO?
The most successful in the regard of raised capital would be the EOS ICO, which raised approximately $4.1 billion during its year-long ICO campaign that ended in June 2018.
How to invest in ICO?
You can easily find aggregators with all the ongoing ICOs listed, for example, icodrops, or icohotlist. Once you find an ICO you would like to invest in, you simply buy the token on the launchpad platform with a more established cryptocurrency, such as ETH.
What are the benefits of initial coin offerings?
The benefits of initial coin offerings include the potential for democratized access to investment opportunities, as anyone with an internet connection can participate, rather than limiting investment opportunities to traditional institutions and accredited investors. They grant early exposure to new projects and big upside potential. Effective funding method for smaller projects with a lot of scaling potential.