Initial Coin Offerings ("ICOs"), an industry that analysts estimate could eventually reach trillions, raised USD 5,014,952,132 in April 2018. Cryptocurrency markets with market caps above approx $100 billion have attracted traders and investors looking for quick gains.
What is an Initial Coin Offering (ICO)?
Initial coin offerings (ICOs) are the cryptocurrency industry's equivalent to initial public offerings (IPOs). An ICO provides businesses with an ideal way to raise capital to fund the development of new apps or services and coins.
Investors can participate in an initial coin offering by purchasing cryptocurrency tokens issued by companies. Such tokens could serve as utilities that directly relate to services or products these businesses provide or may serve as investments in these projects or companies.
The Types of Initial Crypto Offerings
Below is a list of the two main types of Initial Coin Offerings.
Private ICO
Private initial coin offerings (ICOs) typically limit participation to accredited investors like financial institutions or high net-worth individuals; companies may set minimal investments.
Public ICOs
Public initial coin offerings (ICOs) are an investment option open to everyone; private offerings tend to be more appealing due to concerns related to regulatory matters.
Blockchain technology and cryptocurrency use are helping ICOs thrive, with 2017 raising over approx $7 billion and nearly double that amount during 2018. Telegram, an instant messaging service provider from Britain registered company Telegram executed one of the world's biggest ICOs ever, raising more than approx $1.7 billion during an exclusive private offering held exclusively within their system.
How Initial Coin Offer Work (ICO)?
When a cryptocurrency project wants to raise money through an ICO, the project organizers' first step is determining how they will structure the coin. ICOs are structured in a variety of ways.
- Fixed supply and price: A company may set a funding goal or limit. This means each token in an ICO will have a fixed price and total supply.
- Dynamic price and static supply An ICO may have a fixed supply of tokens but a dynamic funding goal. This means the price of each token will be determined by the funds raised in the ICO.
- Dynamic Supply and Static Price: Some ICOs offer a dynamic token supply, but the price remains static. This means the funding amount determines how many tokens are available.
Identification of Investment Targets
First, companies need to decide to raise money after selecting their target audience for fundraising campaign purposes and developing relevant material to share with potential investors about their project or company.
Tokens can be created
Tokens are an integral component of an initial coin offering (ICO). Representing an asset on the blockchain, tokens can be traded and are fungible - although not to be confused with cryptocurrency as most tokens are modified versions of existing crypto-currencies; unlike stocks, they do not represent equity shares in a company and instead give holders ownership stake in products or services developed by it.
Tokens can be created quickly using specific blockchain platforms. Their creation can be relatively painless as no new code needs to be written from scratch; existing platforms, like Ethereum, which hosts existing cryptocurrency, allow token creation with minor code modifications.
Promotion campaign
Companies often run promotion campaigns to attract investors. Such promotions typically occur online to reach as many investors as possible; however, major platforms like Facebook or Google currently prohibit ICO promotion campaigns.
Offers Initial
The tokens are then offered to investors. This offering can be divided into several stages. Investors can use their tokens or the company's proceeds to access the new service or product.
ICO Regulations
Initial coin offerings (ICOs) are an emerging concept in finance and technology. Since their debut, initial coin offerings (ICOs) have had an immense effect on capital-raising processes across many nations; regulatory authorities were initially caught off-guard when faced with this new fundraising model.
Different countries take different approaches to regulating initial coin offerings (ICOs). China and South Korea forbid them, while many European nations and the U.S. are working on regulations specifically tailored for them.
ICOs are subject to regulations in certain countries, such as Australia, New Zealand, and the United Arab Emirates.
White Papers Released
The crypto project will also create a "white paper" (as it is called in the crypto world) to be made available to investors through a website dedicated to its token. The promoters use white papers to provide essential details about the ICO.
- The project's purpose.
- Need that project will fulfill.
- What is the budget for your project?
- What percentage of virtual tokens are the founders keeping?
- Which currencies (and what type of payments) are accepted?
- The length of the ICO campaign.
To entice supporters and enthusiasts of their project into buying tokens, an initial coin offering (ICO) will release a white paper along with its token sale. New tokens may be purchased using digital currency such as fiat money; it has become more common, however, for them to be acquired using cryptocurrencies like Bitcoin or Ethereum instead. These newly issued tokens resemble shares sold during an IPO sale process.
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What Happens to the Funds
An Initial Coin Offering may return funds to investors if their amount falls short of requirements for its success; otherwise, it will no longer continue, and money raised by an ICO will go toward meeting project goals if funding levels are achieved on schedule.
Who can launch an ICO?
Anybody can initiate an Initial Coin Offering. Given their unregulated nature in the U.S., anyone equipped with appropriate technology can create cryptocurrency-related projects and launch them successfully.
Lack of regulation opens the door for those attempting to scam investors into thinking their ICO is legitimate - or worse yet, stealing your funds by misrepresenting themselves - to deceive you into giving over your cash. An ICO's design makes it highly susceptible to being used fraudulently.
ICO - Buying into an ICO
Before investing in any new initial coin offerings (ICO), ensure they can be trusted and trustworthy. Investigate project leaders with experience working on blockchain or cryptocurrency technologies, as red flags must be identified early.
Only some businesses will want to establish an initial coin offer (ICO). When considering whether an initial coin offer could benefit them significantly, assess if doing so will make an impactful statement about them and their industry.
Investors need help keeping up with the latest Initial Coin Offerings. They can research to find ICOs and participate in them, but there are better methods than this. Investors are not guaranteed to be scammed when they invest in an ICO. To help avoid ICO scams, you can:
- Make sure project developers can state their objectives clearly. White papers that are easily understood and have explicit goals make up the majority of successful ICOs.
- Transparency is important. Investors can expect a 100% transparent ICO.
- Check the legal conditions and terms of an ICO. Investors are responsible for ensuring an ICO's legitimacy, as traditional regulators do not generally oversee the space.
- Ensure ICO funds are stored in an escrow wallet. The wallet type requires that multiple keys be used to access the account. This is an excellent way to protect against scams.
You may have to buy other coins to participate in some ICOs.
ICO Hyping
ICOs generate considerable excitement among investors, who gather on websites to discuss new investment opportunities. Celebrities or entertainers such as Steven Seagal may also encourage their followers and fans to invest in an ICO offering.
Floyd Mayweather Jr. and DJ Khaled, two prominent boxing athletes and music moguls, respectively, promoted Centra Tech ICO; it raised approx $30 million by year-end 2017. However, Centra Tech ultimately proved fraudulent; both celebrities settled with U.S. authorities, while three Centra Tech co-founders pleaded guilty to this crime in court.
Investors should gain familiarity with cryptocurrency before investing in initial coin offerings (ICOs). With few regulations governing ICOs and limited safeguards against scammers or untrustworthy actors operating these ventures, prospective investors must tread with extreme care when selecting.
Initial Coin Offering (ICO) vs. Initial Public Offerings (IPO)
IPOs allow investors to raise funds by purchasing ICO company stock shares; conversely, initial coin offerings (ICOs) allow cryptocurrency firms to raise funds by selling coins or tokens directly. Both investment methods entail optimism regarding the company or cryptocurrency's potential to increase in value over time, and investors typically hope their value rises substantially as their time investment ages.
An initial coin offering (ICO) differs significantly from initial public offerings. An ICO does not grant investors an ownership stake in either company or cryptocurrency; players instead gamble that a worthless asset will grow beyond its purchase cost and be worth something in future years.
ICOs can be funded by risk-tolerant investors looking for something fresh and innovative to invest in, similar to crowdfunding initiatives, which give donors the option of giving money in return. By contrast, an initial coin offering (ICO) offers investors the potential for long-term profits over time, sometimes known by its acronym "crowd sales."
Read More: 10 Simple Steps To Launch A Successful ICO
Example Initial Coin Offerings
Ethereum raised nearly approx $20 Million within 42 days during its initial coin offering (ICO) in 2014. This two-phase ICO raised almost approx $20 Million, with phase one concluding in October 2015 and phase two lasting through September 2016. Neo made approximately 4.5 million during this time.
EOS, the platform behind Dragon Coin, broke its record by raising approx $4 billion within 12 months.
On December 11th, 2017, the SEC implemented its inaugural crackdown on an initial coin offering (ICO) by suspending Munchee, a California food app company seeking funds to develop an internal cryptocurrency for ordering food through their app. As per a cease and desist letter sent by SEC describing such offerings as unregistered security offerings.
What Are The Pros And Cons of ICOs?
Initial Coin Offerings (ICOs), the digital equivalent of initial public offerings (IPOs), represent an emerging financial technology.
Both initial coin offerings (ICOs) and initial public offerings (IPOs) provide companies with ways to raise capital for specific projects or ventures. While similar, each has vital differences that impact its processes, regulations, and legalities.
Pros
1. Investors And Startups Can Easily Access This Information
Gumtree offers investors of all types a great place to expand their portfolios - from budding entrepreneurs and freelancers looking for university work. Each investor comes equipped with an investment budget for expanding their holdings.
Due to limited stock and venture capital offerings, businesses offering cryptocurrency investment tokens gain greater access to investors at all levels - providing startups with greater financial access, who may lack enough funding for initial ventures but could increase in value over time.
2. Online Access Is Available
An initial Coin Offering's primary advantage lies in its online transaction platform that facilitates all financial transactions and allows transactions to take place securely online, where transactions and activities can be monitored easily and compared easily against each other. You can quickly investigate everything online by conducting background research using White Paper, which contains critical project details, including necessary solutions or steps.
Background information of team, including Github profiles and LinkedIn accounts of team members; Telegram/Bitcointalk forum community pages for discussion purposes; Plans/milestones for next months/years as outlined here
3. High Liquidity
Liquid assets, defined as assets that can be quickly bought and sold on the market without impacting their value, include crypto coins that operate without physical exchanges requiring physical presence for them to operate effectively and safely as investments. Investors can keep tabs on their investments by monitoring performance on secondary markets and pricing-related investments.
4. Reduced Paperwork
Traditional assets, including initial public offerings (IPOs) and stocks and bonds, traded on exchange, rely heavily on regulatory filings that may take up precious time and energy, potentially deterring investors even after being approved multiple times. Such investments may take more confirmations to gain enough attention to attract sufficient funding sources.
ICOs offer more attractive alternatives than their more conventional assets due to the blockchain's public ledger of transactions allowing instantaneous data updates.
5. Return on Investment is High
Some of the best ICOs have started with a low market value and then steadily increased it. These ICOs were successful because they offered investors something different and exciting that no other ICO could.
Read More: What is Initial Coin Offering: Key Benefits
6. NEO, or Antshares
Chinese version of Ethereum. NEO was successful because it included exciting features like:
- Digitized Assets.
- Peer-to-peer networking.
- Secure Identification.
- Forms of decentralized commerce.
These ICOs are supported by large corporations like Microsoft and Alibaba, making them reliable and safe ICOs. Furthermore, China supports them, giving them an edge over competing ICOs; its current value in 2019 is 7.08 USD.
Cons
1. Volatile
As cryptocurrency technology develops and becomes more specialized, its price can fluctuate quickly as more ICOs enter the market and vie for investors' attention. Investors should expect rapid shifts due to various factors affecting their current worth, which can provide an exciting or nerve-wracking journey for potential investments.
2. A Potential Fraud
Investors are responsible for thoroughly scrutinizing team member profiles to ascertain if any claims made in the White Paper can be met, not all investors can discern between an ICO that offers fair value and one that might be fraudulent and dishonest.
Many initial coin offerings (ICOs) do not face the same stringent regulation that governs other assets like stocks and bonds; this makes ICOs easier and cheaper to acquire while leaving them susceptible to fraud and illicit practices, leaving them open to illicit firms looking for easy ways to obtain funds through them.
3. Lack of Accountability
Startups or private institutions create many Initial Coin Offerings (ICOs) without sufficient capital to launch their projects. Yet, investors hope for high returns with no guarantee that companies can fulfill all promises made in an ICO offering.
Before investing in any ICO, investors are advised to do a comprehensive investigation of the company, taking note of its reputation, key personnel and previous projects undertaken successfully.
How Does ICO Function?
The ICO model allows startups to raise money by distributing tokens as a fundraising campaign. Tokens are issued on a Blockchain (a secure list of records protected using cryptography) and distributed in exchange for a contribution. The tokens can be traded and transferred on cryptocurrency exchanges. They can perform various functions, from granting access to certain services to giving the owner the right to receive company dividends. Tokens can be classified into utility and security tokens, depending on their function.
Utility Tokens
Utility tokens (commonly referred to as "user coins" or "app tokens") represent the future of any product or service provided by businesses, making ICO startups possible while simultaneously raising funds through user access fees for blockchain projects. As these utility tokens don't represent traditional investments into companies but instead reflect an alternative form of compensation to access services in exchange for token holders' future use, utility tokens don't fall within securities law regulation restrictions. They may even allow the token holder to bypass them entirely.
Utility tokens allow startups to sell digital coupons for services still under development, similar to how electronic retailers take pre-orders of video games that may not release for several months. A prime example of such utility tokens would be Filecoin which sold tokens that gave access to its cloud storage service and raised approx $257,000,000 selling them. This practice avoided looking as though businesses selling utility coins were offering securities or offering securities, thus opting instead to refer to events as token creation events or distribution events rather than "ICO."
Security Tokens
Utility tokens that draw value from external assets or can appreciate work done by others may be classified as security tokens subject to federal regulation. Failure to abide by these rules could incur costly fines or lead to the cancellation of an entire project. Businesses must fulfill all regulatory obligations; once token classification has taken place, numerous applications can be developed using it. An especially appealing opportunity lies within token issuance, representing company shares - Overstock is currently engaging in this practice. Currently, it issues tokens representing company shares as tokens to its customers. Overstock has announced that its subsidiary tZERO will hold an Initial Coin Offering to raise funds for creating a security token trading platform. According to the report, tokens were issued according to Securities Exchange Commission rules; holders will then enjoy quarterly dividend payments generated by the tZERO trading platform.
Many industry observers, such as Mr. Byrne, predict that initial coin offerings (ICOs) will eventually replace or augment traditional public offerings in their operations.
Questions
Joichi Ito, Director of MIT Media Lab and Professor in Practice of Media Art & Science, expressed concerns over what he referred to as an irresponsible use of cryptocurrency, leading to its popularity with investors and users alike. Cryptocurrencies such as Bitcoin are being misused irresponsibly, which harms people while harming the ecosystems of developers & organizations as a whole.
It expresses her concerns that initial Coin Offerings (ICOs) aren't adequately regulated by IPO regulators, enabling issuers and investors to take advantage of unknowing investors purchasing tokens with questionable values. She feels regulation must become more technical and sophisticated before anyone takes an impulse-buy decision on one of the many available ICOs on offer to the public without fully comprehending all associated risks.
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Conclusion
An Initial Coin Offering, or ICO, can be described as a hybrid between an Initial Public Offering (IPO), online crowdsourcing and a crowdfunding campaign. A token issuer sets an exchange rate, so users contribute existing coins in exchange for "X amount of new tokens in return."
A token serves two functions, usually either utility or security. Utility tokens remain unregulated, enabling startups to raise capital without regulation for their projects by offering tokens in exchange for access to services they plan on building in exchange for tokens they issue as funding sources. On the other hand, security tokens are similar to stocks; they're traded and have ownership characteristics, and the Securities Exchange Commission regulates them. ICOs are still a relatively new concept, so concerns have been raised regarding the token value and issues with wealth gains; only time will tell whether this funding method will become viable in the long term.
