The global economy has been going through numerous changes recently. One of the most significant changes in the last couple of years has been the opening of Initial Coin Offerings (ICOs).
It comes as no surprise that one of the prevalent questions in the crypto verse this past year has been, undoubtedly, ‘what is an ICO?’.
While most of you might be accustomed to popular cryptocurrencies such as Bitcoin and Ethereum, some of you might not be familiar with ICOs.
Hopefully, with this post, you could get some perspective on this matter.
Before we jump straight into details and facts about ICOs, let me give you a brief idea of the technology working behind ICOs — blockchains.
Blockchain
A blockchain is often used in connection with Bitcoins and similar cryptocurrencies. But that is not the case. A blockchain is not Bitcoin or any other crypto.
It’s just that cryptocurrencies use the blockchain. To put it simply; a block is a group of transactions. A chain is a group of blocks that are connected. Combining those two words, and there you have it – blockchain.
All these blocks are linked together on the chain to form a public database. This database is public as it is shared with hundreds or even thousands of computers, connected in the crypto verse. We can hold these computers as servers for the blockchain/the database.
Any additions made to the database require to be verified by more than 51% of the nodes. If they are not verified as required, the conversion cannot be made.
This makes it pretty hard to hack the database since you would need to hack more than 51% of the nodes, and lots of different people and companies usually own the nodes.
This effect is known as decentralization – implying that the database is not saved in one single place, instead of in groups of different places.
When we discuss “changes” over the database, this is referring to the data. For example, in the case of Bitcoin, these are transactions of Bitcoins — people transferring Bitcoin to other people.
What is ICO?
The term ICO stands for Initial Coin Offering. It is a new and innovative way to foster capital for all sorts of blockchain and blockchain related projects by trading cryptocurrency.
New projects employ it to sell freshly mined crypto tokens in exchange for Bitcoin, other cryptocurrencies, and, at certain times, fiat.
In a way, it mirrors Initial Public Offerings (IPO), except that ICO’s are often unregulated and grant little to none rights to investors.
ICOs in common is a type of crowdfunding or crowd investing tool managed entirely on the blockchain. Initially, the main idea behind an ICO was to finance new projects by pre-selling coins to investors who are interested in the project.
Entrepreneurs present a whitepaper defining the business model and the technical aspects of a project before the ICO.
They put forward a timeline for the project and set a target budget where they describe the future funds spending as well as coin circulation, how many coins are they going to keep for themselves, token supply.
Throughout the crowdfunding campaign, investors buy tokens with already established cryptocurrencies like Bitcoin and Ethereum.
ICOs can be related to IPOs. An IPO is defined as an Initial Public Offering — which is a term applied when a company first issues its stock onto the stock market.
Before that, the company’s stock would be private, and its shares were not available to the public. Hence, Initial Public Offering. It ’s essential to understand the disparities between the IPO and what is an ICO.
When a certain company lists themselves on the stock exchange, people and other companies that are showing interest in the companies can buy shares in the company for a settled price.
The shares can be utilized to vote on specific actions that the company is taking as you have authority as a partial owner of the business!
If the company performs well, the state of their shares similarly expands, and you can sell them later on for profit. ICOs are not as absolute as IPOs.
ICOs can be regarded as a means of crowdfunding. With an ICO, you are provided with tokens.
These tokens do not grant you any long-term authority or control over the project. They are simply a means for the project to build funds.
Still, if the project turns out to be a success, the value of your token could rise. So, you will have an option to trade the token for more than you got it for.
Working of ICOs
To explain the core concept of an ICO or define what is an ICO better:
If you want to start your cryptocurrency or dApp, you will need much money.
To get this money, you can operate an ICO. If people show interest in your ICO and think the project is right, they can buy your token for a certain price.
These prices are generally set in Ether (ETH). Yet, some projects accept more than one cryptocurrency, usually Bitcoin (BTC) and Litecoin (LTC).
When you spend in an ICO, you send your ETH, BTC, LTC or whichever currency you want to spend in, to the ICO smart contract.
This smart contract then sends you the number of tokens that you have spent for.
There are usually two key reasons for buying tokens from ICOs:
- To sell the token in the future for a higher price
- To use the token for it’s purpose
Tokens frequently provide the owners of the token with benefits, like reduced fees, a share of profits or bonus features.
Some tokens can be utilized to purchase items on the project’s app when it is created. These types of tokens are known as utility tokens
What is an ICO: How Do Investors Know Which ICOs to Invest In?
ICO’s, are comparatively a new phenomenon but have promptly become a compelling topic of discussion within the blockchain community.
Many see ICO projects as chaotic less secure platforms that allow originators to cultivate an unjustified amount of capital, while many others argue it is an excellent innovation in the regular venture-funding model.
The department of the U.S. Securities and Exchange Commission (SEC) recently ruled on the status of tokens distributed in the infamous DAO ICO which forced many projects and creators to re-examine the funding models of many ICOs.
The most significant criteria to analyze is whether or not the token passes the Howey test. If it does, it must be treated as security and is subject to certain restrictions imposed by the SEC.
Just because the concept is good, it doesn’t mean the project will be successful! An idea can seem reasonable, but then completely fail once it raises funds.
There have even been instances in which ICOs have turned out to be outright scams! So, now that you understand what is an ICO make sure that when researching an ICO, you are careful.
Are ICO’s Beneficial to you?
The golden era of ICOs has entered in. According to numerous trend reports, the prevalence of ICOs backed by in-demand projects is growing with each day.
This new trend in the crypto verse is beneficial for all the concerned parties, including the project behind the ICO, the investors, and the users.
Here are some of the benefits of investing in an ICO.
- No Boundaries
ICO is usually launched for global markets. A token sale gets traction and opens for business than the stakes as their scope are not that wide. The international base enhances chances to grow by 20-25 times more in the given buyer range. - Decentralized System
The token initiation can be initiated in any country in the world. The decentralized system requires no involvement of the central government and banks, and it conceives further individuality. The investors likewise get more benefits from this than traditional banking systems. - A New and Innovative Business Model
The ICO launch model administers a technically practical solution for tech companies where primary users get an equal share of the share, and the company receives gross success. - The advantage of ICO Mechanism
The ICO mechanism is formed with many useful features. ICO coins can be combined or partitioned. Coins are easy to swap for selling and buying at crypto exchanges. - Best Investment Returns
For those in the investing community who are looking to invest in a new ICO, this is an excellent choice to get early and quick profits. As the followers rise, the fund raises also increase respectively and so the investment as well.
Do not be startled if ICO completely replaces IPO and other traditional fundraising mechanisms in the coming days. It is possible if not yet confirmed.
Advantages of ICO
Democratization: Support projects to bypass the traditional method of asking Banks/Venture Capitalists that may demand a lot of time and resources.
Anyone can buy and can earn the possibly huge returns just like how the big boys are accustomed to. Of course, financing in ICO’s is undoubtedly a high-risk venture.
Immense Profit Potential: Many in the space want to invest in the “next Bitcoin,” potentially riding the wave of buying coins at pennies on the dollar and selling them later at an astronomical valuation.
Most ICOs have only a conceptual white paper with little to no proof of concept, thereby validating a high payoff potential due to the extremely high-risk investors are taking.
Disadvantages of ICO
The absence of Regulatory Oversight:
Regulations are useful in that it protects people/investors/you. Currently, the ICO market is unregulated and can attract bad actors that are fraudulent/manipulative/scammers.
It’s easy to raise money through ICO:
Write a white paper, and you’re good to go. Conclusion? Be very careful, and do enough research before making any decisions!
No Track Record:
The preponderance of ICOs don’t even
Not only that, ICOs have required for an incredibly large amount of funding.
For example, the biggest ICO was the Tezos crowd sale, which netted a whopping $232 million. Appraisals like this are non-existent in a traditional setting.
Future of ICO’s
An ICO is an independent way to increase the funds for a new cryptocurrency startup which will result in significant benefits for your investments in ICO.
In the process, the division of the cryptocurrency is available on offer to initial subscribers in terms of transfer of cryptocurrencies or legal tenders.
Before allowing ICO, the company issues a white paper mentioning about the project, purpose, money required to undertake, type of money admitted, the time duration of ICO campaign, virtual token kept with them and aimed to be furnished by the project when it completes.
People were attracted to this new type of virtual currency and aspired to test their luck with the new technology. In the starting, the project was outlined in white papers by a developer who already had experience in bitcoin.
As the first ICO was prosperous and inspirational, the other developers got drawn towards more of ICO launches. Consequently, more and more ICOs were launched after that year and many more are in the line as well.
For those followers who invest in ICO, the chances are quite high to get the benefit as the ROI stands tall for the material investment.
With the promising track record of ICO transactions, it is also regarded as a disruptive, innovative tool of this age.
Since all the ICO or
As these firms are not regulated by some authoritative financial ruler such as SEC, the possibilities of losing your funds are high as well as the deceitful initiatives are hard to track down.
So before you invest in a fund-raising operative, it is advisable to study thoroughly about it before buying it out of the blue.
Final Verdict
Though the uncertainties involved in ICO is great, the probability of gains is equally high. You can call it as a high-risk, high-reward market.
It is designated for brave investors who are looking for shots in uncertainties. Overall if you are thinking of invest in an ICO then complete due diligence first.
If you are preparing to launch your startup using ICO then assure that you are pleased with the technology and the coin that will make your money.
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