Initial Coin Offering (ICO)
Ryan O'Grady,January 15, 2018
What is an Initial Coin Offering (ICO)?
ICO or Initial Coin Offering is a mechanism to create or start a new Coin in cryptocurrency. The pre-created token can be easily sold and traded on all cryptocurrency exchanges if there is demand for them.
The main idea of an ICO was originally to fund new projects by pre-selling tokens or coins to investors who have interest in the projects. Most of ICO projects is using Blockchain network, which is a secure transaction ledger database that is shared by all parties participating in an established, distributed network of computers. Blockchain makes it easier for users to access their data and doing an online transaction because it has both private encryption and public encryption.
An ICO works just like an IPO (Initial Public Offering), but instead of selling shares, in ICO they sell Blockchain-based tokens. An Initial Coin Offering is an event that usually extends over a period of one week or more and in which everyone is allowed to purchase newly issued tokens in exchange for established cryptocurrencies like Bitcoin (BTC) or Ethereum (ETH).
Type of ICO
There are two purposes of using ICO, Crypto Coins and Crypto Tokens:
1- Crypto Coins – to create a new coin which is different to Bitcoin and has its own unique feature and blockchain. One of the most successful ICO’s crypto coins is Ethereum (2013).
2- Crypto tokens – to create a new project, for which to work a special currency is needed. The equity is raised via crowdfunding, so everybody can take part of it. Later on, the bought equity can be sold on some specific crypto exchanges. This is similar to startups, so you invest in the idea behind it and hope they get profitable. A crypto equity is equivalent to a crypto token. An ICO crypto token can be traded on every exchange, but only if the exchange accepts it.
There are a number of factors that must combine in order for an ICO to become attractive. These factors include a solid idea, strong team, alongside a reasonable hard cap. Just how the ICO intends to collect its funds also contributes to its attractiveness. Most ICOs, should be called token generation events (TGE) since they are based on the ERC-20 protocol and don’t own their own blockchain. The ERC-20 is a token standard that follows specific rules on the Ethereum blockchain because most the ICOs happens there.
Who Can Join an ICO?
As a new alternative way of fundraising, ICO is a disruptive aspect of the cryptocurrency ecosystem. The important note is that ICO has no restriction on who is allowed to join the fundraising. It enables not only notable companies, but also people who have enthusiasm towards digital currency markets to become investors. This is why ICO is interesting, because it’s avoiding traditional methods of funding.
In short, everyone who has a cryptocurrency wallet can join the ICO. Technically login to your wallet and look for an ICO to invest in. If you have already chosen an ICO to invest in, then you probably visited the company’s website. There you can usually find a lot of information about the project, plans for progression and the team, backers and supporters, and all things that supported the ICO. They will also give you specific instructions on how to participate in their ICO.
Despite the attractiveness of an ICO, we should be extra cautious while selecting which ICO to invest in. Due to the exponential growth in public interest, esoteric terminology and a lax regulatory framework, it’s no surprise that ICOs have been used by scammers to cheat on investors to fund an imaginary project.
Before you decide to join the digital coins markets, remember that investing in cryptocurrencies is risky and not all risks are in plain sight. Cryptocurrency ecosystem doesn’t have a regulatory authority, so you have to do your own homework by double checking the ICOs before investing in one. Do yourself a favor and always do an in-depth research on the company and the project, then the decision is yours to make.