What Is An Initial Coin Offering (ICO)? How Does It Work?
On Dec 02, 2020
There is a term that people involved in cryptocurrencies have encountered a lot. ICO, which stands for Initial Coin Offerings. In other words, the first placement of coins (tokens).
If you want to learn, “What is ICO?” “How it works?” you’ve come to the right place.
ICO, an expression derived from the IPO acronym, creates fundraising for a new token or coin in the cryptocurrency world. An initial public offering (IPO) or launch of a stock is a traditional fundraising process in which shares of a private company are sold to institutional investors.
Initial Coin Offering is a way to raise capital for any blockchain-related project by selling cryptocurrency. It is an interesting alternative to crowdfunding. ICOs are seen as a fundraising tool to finance any blockchain project in exchange for issued tokens. Interested investors can accept the offer and buy a new cryptocurrency token issued by the company. ICOs today are mostly based on an Ethereum smart contract and often built on the model of the ERC20 standard.
A Brief History of ICOs
Now let’s take a look at when the Initial Coin Offers first came out and what well-known cryptocurrencies today were funded by ICOs.
If we look back, we can see that the first ICO initiative was launched in 2013 by Mastercoin, a digital currency and communication protocol. It officially rebranded in 2015 and nowadays is known as Omni.
Even though there have been a few new ICO initiatives following the Mastercoin, Ethereum has been the most prominent. In mid-2014, the Ethereum Foundation sold ETH at 0.0005 Bitcoins each. With nearly $ 20 million in revenue, it became one of the most important crowdfunding funds ever.
ICOs have been growing steadily since 2013 – 2014, but there was no significant interest until 2017. Between 2017 and 2018, ICOs were revived, just like the entire cryptocurrency community. At that time, interest in ICOs increased by 30-40 times. During this period, the EOS decentralized application network also went down in history as the largest ICO. In the ICO, which lasted for 11 months, almost 4 billion raised by venture capitalists.
Interest in ICOs peaked in 2018. However, the recession soon followed. One of the possible reasons behind the slowdown could be the potential risks of ICOs. Another reason is that interest in cryptocurrencies skyrocketed in 2018, and most of the enthusiastic people took action. The ICO market stagnated in the following years, with the major cryptos that were previously created maintaining their market positions.
How Does ICOs Work?
The working mechanism of the ICO is quite simple. Imagine a brand-new token has been created. Its founders, the team behind the coin, decide to raise money for this newly created blockchain project. This is where the ICO concept comes into play. Most of the time, ICO tokens are issued via dApps, more specifically Ethereum. Everyone who finds this new token attractive contributes to this new project through ICOs. They buy the token exchange for other cryptocurrencies (Bitcoin, Ethereum) or fiat money (dollar, euro). Then, investors expect that the price of this token will rise and appreciate in a short time.
What Are the Differences Between Initial Public Offerings?
As we mentioned earlier in our blog, there is a certain similarity between ICOs and IPOs. However, these two concepts are different from each other according to their many features. Here are some of the considerable differences:
By investing in an IPO, you get a share of the company you invest in. But when you invest in an ICO, you support a new blockchain project and get tokens. Your only motivation is the future return of your investment. Another crucial difference is that ICOs are much freer in structure than public offerings. Government agencies like the Securities and Exchange Commission (SEC) don’t examine them.
What Are the Risks of Participating in an ICO?
As ICOs came to the forefront in the cryptocurrency and blockchain industries, they brought challenges, risks, and unforeseen opportunities. Looking at the Ethereum example, it is clear that the ICO is a successful choice for most investors. Over time, Ethereum gained significant value. Unfortunately, the situation has not always turned out to be this prosperous. Some of the ICOs failed to keep on to most of their promises, which damage investors. That’s why there are some things you should carefully consider before investing in any ICO token. While many people are purchasing Ethereum in Dubai to hold it because of it being the most advanced and secure coin after Bitcoin.
The most important one is, the company that initiated an ICO initiative was completely transparent throughout the process. First, the developers of the project should have a good reputation. They must be relevant in advance for cryptocurrencies and blockchain technology. Second, the project should have a clear whitepaper and roadmap. Finally, it’s worth paying attention to the average percentage of return on investment. Offers above-average often do not reflect the truth.
As a result, ICOs once played a crucial role in financing many well-known projects today. This alternative fundraising method has even benefited many investors. However, it is necessary to think carefully before investing in an ICO token. It should always be kept in mind that there may be a lot of risk of spam in the market.
Disclaimer: All information provided in the content is for informational purposes only and should not perceive as an investment, financial, or trading advice. Any investment decision you make should be a personal choice based on financial knowledge, experience, and market research.