What is an ICO: A Short Introduction.
Every time a new cryptocurrency comes out, you hear of the abbreviation ICO. You don’t know what the full meaning is and what it’s all about in the first place. Therefore, we decided to go back to the basics of cryptocurrency. Let’s talk about Initial Coin Offering (yes, that’s the full meaning).
What is an ICO?
An ICO is an unregulated method of raising funds for the launch of a new cryptocurrency. In other to avoid the difficult and problematic process of raising capital through banks, startups depend on initial coin offering. The process usually involves the sales of a percentage of the new cryptocurrency to early backers in exchange for regular currency like U.S. Dollars, or other cryptocurrencies like Bitcoin. Another name for ICO is Initial Public Coin Offering (IPCO).
How an Initial Coin Offering Works
The first thing a cryptocurrency startup does when they intend to raise capital through an Initial Coin Offering (ICO) is to draw a plan on a whitepaper. This plan should include details of the project. What it’s about, what needs it’ll meet upon its completion and the amount of money needed to undertake this venture. The whitepaper should also contain the quantity of virtual tokens the pioneers would keep for themselves, the type of currency accepted and the duration of the Initial Coin Offer (ICO).
Like shares sold during Initial Public Offers, folks who support the startup’s project will purchase some of the distributed cryptocurrency, now known as tokens, with either fiat currency or Bitcoins. An Initial Public Offering is considered unsuccessful if the money raised doesn’t meet the minimum amount required by the startup. In this case, the money has to be returned to the backers. However, if the required money is raised within the timeframe that was specified, the ICO is considered successful.
Why People Invest in Initial Coin Offer (ICO)
Back in 2014, a new platform, Ethereum announced its ICO. They needed a total amount of $18 Million or $0.40 per Ether. Not only did they raise the required amount, the value of Ether skyrocketed to $14 with its market capitalization rising above $1 billion.
The point of this example is that people invest in ICOs because they hope that when if the ICO becomes successful, there would be a rise in the value of the new Cryptocoin, which should easily translate to profit.
Initial Coin Offering (ICO) Vs Initial Public Offering (IPO).
There is a striking similarity between Initial Coin Offering and Initial Public Offering. The primary similarity is that a stake of the new company is sold to raise capital for the company. The only difference is the type of people that invest.
In Initial Public Offering, investors invest in a company with the expectation of a higher return. The same thing occurs during Initial Coin Offerings. The only difference being the investors are considered supporters or backers of the project. This is the primary reason why Initial Coin Offering (ICO) is also known as Crowdsales