If you are conversant with the growing crypto industry, you must have seen the abbreviation, ‘ICO’ meaning Initial Coin Offering.
This is not a crypto token or coin but one of the processes by which a coin is being launched. Initial Coin Offering (ICO) like Initial Public Offering (IPO) is a form of crowdfunding. This is the practice of funding a project or venture by raising money from a large number of people.
Several crypto projects like Ethereum, Cardano, etc had their ICO before becoming a giant in the industry. As it is with some crypto projects, ICO is not without scams.
In this post, we’ll learn about Initial Coin Offering (ICO) and how it works.
What is Initial Coin Offering?
An initial coin offering (ICO) also known as initial currency offering is a form of funding using cryptocurrencies. It is a popular way to raise funds for products and services usually related to cryptocurrency.
A company seeking to raise money to create a new coin, app, or service can launch an ICO as a way to raise funds. Investors or speculators buy this tokens or coins in exchange for fiat currency or other generally accepted or stable crypto assets.
The tokens/coins are promoted as future functional units of currency if or when the ICO’s funding goal is met and the project successfully launches.
The token in question may have some utility related to the product or service that the company is offering, or it may just represent a stake in the company or project.
ICOs can allow startups to avoid regulations that prevent them from seeking investment directly from the public, and intermediaries such as venture capitalists, banks, and stock exchanges. They may also fall outside existing regulations. This may depend on the nature of the project, or be banned altogether in some jurisdictions.
How Does It Work?
Initial Coin Offering (ICO) may come after seed sales and private sales for some crypto project start up. The ICO process can then be structured in three different ways in its aim to raise fund for the project.
A company can set a specific funding goal or limit. This means that each token sold in the ICO has a preset price, and the total token supply is fixed.
In another way, an ICO can have a static supply of tokens and a dynamic funding goal. This means that the amount of funds received in the ICO determines the overall price per token.
ICOs can also have a dynamic token supply but a static price, meaning that the amount of funding received determines the supply.
The crypto project’s whitepaper is also created which gives the potential investors details about the project. Here, investors can know what’s in for them if they put their money into such project.
Investors can generally use legal tender or digital currency to buy the new tokens. Bitcoins, Ethereum, and USDT are the most common form of cryptocurrency used.
The ICO is not successful when the minimum amount required the company is not met. In this case, all of the money raised may be returned to the project’s investors.
If the funding requirements are met within the specified time period, then the money raised is spent in pursuit of the project’s goals. It is deemed successful this way.
Things Investors Need to Know Before Participating in Initial Coin Offering (ICO)
Here are some tips for investors who are looking for projects to invest in at the initial coin offering phase. They are listed discussed below in no particular order.
1. Do your own research- If you’re going to invest in cryptocurrency, it is very important to understand the industry. Do your own research on the token, project and keep yourself abreast with the with the happenings in the market.
2. Study the whitepaper- This is where you can get to know more about the project. From the whitepaper, you’ll know what the project is about, the need that the project would fulfill upon completion and how much money the project needs.
You’ll also get to know how many of the virtual tokens the founders will keep, what type of payment (which currencies) will be accepted and how long the ICO campaign will run.
3. Beware of scam– You’ve to beware of fake projects if you’re investing in cryptocurrency. Fraudsters often try to take advantage of the numerous beginners who has yet to have full knowledge of the industry. They may lure you with huge return on investment. This may come through emails or text.
4. Check that ICO funds are stored in escrow wallets– This type of wallet requires multiple access keys, which provides useful protection against scams. You just have to do your homework on this to be assured that you are raising funds for fraudsters.
Risks Associated With Initial Coin Offering (ICO)
As it is with most crypto endeavors, the stage of initial coin offering is not without risks. The main risk being that there are fake companies/projects out there. Due to the lack of regulation and enforcement of securities law, ICOs have been the vehicle for scams and fraud.
In this case, someone might do whatever it takes to make you believe they have a legitimate ICO—and then abscond with the money. Of all the possible avenues of funding, an ICO is probably one of the easiest to set up as a scam.
Anyone can launch an ICO which makes it an easy way to rob people of their hard-earned money if investors don’t do their homework.
Another risk associated is bubble. Some investors have flooded into ICOs in hopes of participating in the financial gains of similar size to those enjoyed by early Bitcoin or Ethereum speculators.
Initial coin offerings are a popular way to raise funds for products and services usually related to cryptocurrency. It is a win-win situation for the parties involved i.e. the company raising funds and the investors.
The project owners get fund to proceed to the next phase of their project while investors make profit after buying a token at a low price. Although it is a gamble for the investors, the projects owners also wish ICOs are success.
The lack of regulation and security of ICOs make it an easy avenue to scam people. If you must invest in a start-up project, you must do your findings well.
Also Read– What is Crypto Launchpad?