So the enduring appeal and influence of crypto industry brought you here? Then this guide is the perfect head start for you to know all about Initial Coin Offering (ICO). Since the inception of Initial Coin Offering (ICO), over $10 billion has been invested in them.
Start-ups find ICO’s a huge boon as it is a new method to accept funding where new digital tokens or coins are issued. With this fundraising platform, entrepreneurs and companies all over the globe are starting to enter into this platform. ICO is a serious business where many companies look to get funded. Telegram recently raised over a billion dollars through ICOs, challenging the traditional form of funding.
Earlier this year, three of the largest IPOs just raised about $5 billion in total. Countries like China has put up a complete ban on ICO, whereas the United States and the European Union, with their vying tax and privacy, havens, have an entirely open approach. Currently, there are over 1,000 digital tokens, and we will explore you how precisely an ICO works.
What is the Initial Coin Offering (ICO)?
ICO or Initial Coin Offering, which acts as a fundraising tool is offered to investors with a few units of new cryptocurrency or tokens in exchange for cryptocurrencies like Bitcoin and other altcoins. Since 2013, ICOs are used in the development of new cryptocurrencies.
Ethereum is one of those platforms that allow companies to create their own digital coin. The companies will then go for a public ICO where investors can buy the newly-minted digital tokens. They will then pay for the coins with other cryptocurrencies like bitcoin or ether.
With the success of Ethereum ICO, more and more come forward to fund the development of crypto projects by releasing tokens which in some way are integrated to the project. In comparison with other fundraising methods like Initial Public Offering (IPO) or venture capitals, the investors do not really hold any equity stake in the company.
Take, for example, buying shares in a public firm will only give you a slice of it. Whereas, an ICO can also be used on products that are created. The digital tokens can be traded for profits, as it is said that their tokens are about to improve in their value.
In 2013, Ripple Labs started a payment system called ‘Ripple’ and developed around 100 billion XRP tokens. The tokens were later sold to fund the development of the Ripple platform. In the same year, Mastercoin to tokenize Bitcoin transactions promised to create a layer on Bitcoin. The develops made a sale of million Mastercoin tokens against Bitcoin and received somewhere around $1 million.
There are quite a few companies that have received fundings from ICO, here are few examples: In 2014, Ethereum foundation sold ETH against 0.0005 of bitcoins each. With this sale they received roughly around $20 million, becoming one of the most massive crowdfunding helping in the development of Ethereum.
Ethereum’s entrance into the smart contracts opened the way for new generations of Initial Coin Offering. As of now, ICO’s legality is entirely undefined. These tokens are not sold as financial assets but as digital products like many other things. And because of this ICO’s are called “crowd sale”. Due to some jurisdictions, the fundings taking place through an ICO are not that regulated, enabling the process to be paperless and much more comfortable.
However, there are other jurisdictions which are aware of ICO practices and regulate it similar to the sale of shares and securities. Currently, ICO’s only happen in gray areas, but sometime in the future, it might get regulated. Although the ICOs can bear a considerable amount of financial and legal risks for investors.
One major drawback of ICO is that of the cost which is required for regulations and is quite higher in comparison with the traditional form of funding. The question here is that whether the ICOs are legal or not? The answer is simple, it all depends where you are filing the ICO from. ICO has its own ups and downs, like for example, ETH was sold for 0.0005 bitcoin which is worth 0.05 BTC. That makes the profit of 10000 percent.
When talking about the loss, currencies like Lisk or Omni not really hold the value in Bitcoin which have been evaluated at the ICO. Crucial advice for all the startups and entrepreneurs will be that ICOs are often considered as scammers. Also, does not carry significant profits for investors but come with losses that are huge.
Also read: What is Blockchain? | Beginner’s Guide
ICO clearly has a few problems, however, it also does come with a lot of potential in the future. If ICOs happen to survive, it will pose a significant threat to the traditional form of funding like IPOs, venture capital or corporate debt.
To make investment decisions you need to make a smart move. And to help you learn more about the crypto industry, our resources will help you.