What is an Initial Coin Offering (ICO)?
An Initial Coin Offering (ICO) is the launch of a new cryptocurrency and the sector’s equivalent to an initial public offering (IPO). ICOs are a way for new crypto projects to gain funding and attention or launch a coin, token, app, or service.
- Crypto ICOs have raised over $50 billion in funding and coin sales in less than a decade.
- EOS held the largest ICO, raising $4.2 billion in 2018. Ethereum launched from an ICO in 2014.
- Many cryptocurrencies began with an ICO after the rush of 2017, but 80% of ICOs in 2018 were scams, and even credible ICOs only have a success rate of 10%.
- ICOs and pre-sales remain popular, and careful investors can identify, support, and even profit from successful ICOs.
How do ICOs Work?
New cryptocurrency companies and projects launching new coins via an ICO usually seek to raise funding for their initiatives or kickstart a new token or NFT.
ICO stages and coin dynamics
After planning business goals, companies launching an ICO will plan out the fundraising and coin sale stages. ICOs can have one or more funding rounds, which can be spread over time with varying coin prices and incentives for investors.
The developers will plan how a coin will be structured and governed, deciding if the token supply or price will be fixed and at what stages. Coin governance may depend on whether the crypto has its own independent blockchain or uses an existing platform like Ethereum. Many ICOs are Ethereum ERC-20 tokens using the Ethereum blockchain.
The whitepaper
Like a pitchbook or a business plan, a project’s whitepaper will outline the project’s goals, the ICO and its stages, and how the cryptocurrency will be governed and managed in the future.
A good whitepaper should detail the technical elements of a coin and its governance and any planned product or service and provide information on the company, the team, and how any funding raised will be used. A whitepaper is a critical tool for investors to assess whether the project or coin has potential and if it’s credible and not a scam.
Funds raised
If an ICO fails to sell enough of the coin or token and raise the required funds, the project may flop immediately. Investors should have their purchase refunded at this stage, and it’s best to ensure a whitepaper covers what happens in this instance, as there is a risk of this not happening.
Investors should always remember that the cryptocurrency sector and ICOs are not widely regulated, and investors are not protected against scams and failed projects. Many investors have lost their stakes in new ICOs.
Launching a cryptocurrency
Once an ICO is complete, the resulting token or coin is usually listed on cryptocurrency exchanges and becomes available for the broader market to buy, sell, and trade. At this point, a cryptocurrency can accumulate value, but its value can also plummet depending on the coin or token and the project’s success.
What is the Purpose of an ICO?
The primary purpose of an ICO is for a company to raise funding by launching a cryptocurrency. The following types of tokens can be created:
Utility tokens
These tokens have utility on a blockchain or in an application or otherwise benefit the user in some way outside of being a crypto asset.
Asset tokens
Asset tokens are less popular and may be associated with a physical asset. These are more likely to be regulated or restricted.
Reward tokens
Again, less common, these are reward or reputation tokens, and they cannot be traded.
Equity tokens
Generally, ICO tokens do not grant the purchaser shares in a startup or company. Specific equity tokens do and may allow purchasers ownership rights in the company and part in decision-making.
Pros and Cons
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Early investment : ICOs gained popularity quickly as investors flocked to buy cryptocurrencies that would accumulate substantial value later. Some investors made their fortunes, and others lost. ICOs still have the potential to reward an early investor, but much care is needed to avoid scams and projects that will fail. Be sure to know upcoming ICOs to watch for -
Supporting a project or company : Cryptocurrency advocates often purchase the tokens of a project they wish to support, a technology development they believe will be successful or become foundational, or to fund an ecosystem they want to be part of.
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Scams, hacks, and projects that will fail : There have been many, many ICO scams. Some have lost investors millions. Not only is the sector plagued with scams, illicit actors, and cyberattackers, but the ease with which an ICO can launch means there have been many weak projects that also simply fail. -
Lack of project transparency and pump-and-dump schemes : Leading on from the last point, without sector regulation, ICO creators aren’t required to follow any particular guidelines or provide transparency as to the use of funds. Credible projects, however, will. There’s also a risk that project backers and other influencers or investors will artificially inflate sentiment and price and sell their tokens high, leaving unwitting investors holding duds. -
ICO regulation : Though a lack of regulation can make it easier for companies to raise funds via an ICO or for investors to capitalize on the launch of cryptocurrencies, a lack of appropriate regulation means more scams and zero investor protection. In the US, if an ICO coin is classified as a securities offering, the ICO will be regulated by the US Securities and Exchange Commission
Conclusion
A last point to note is that there is much debate about classifying individual ICO coins and cryptocurrencies.
Here is a related article you may like on ICO vs IPO differences
