What is an ICO

What is an Initial Coin Offering and what does it mean for the crypto industry?

by Coins.Online
23 April • 3 min
In Coins

The Blockchain industry generates an increasing amount of cryptocurrencies and related tools each year. Thanks to the global digitalization of various assets and services, new instruments, such as the ICOs, have been emerging. But how can investors accurately evaluate the new investment opportunity? To be able to better comprehend the idea of the Initial Coin Offering (ICO), one should first make the correlation with the Initial Public Offering (IPO). 

An IPO is a process of releasing a private company’s equity to the public via stock exchanges within the regular economy. Similarly, an ICO involves the issuance of digital tokens by a company and accommodating them on a cryptocurrency exchange market. Both processes are aimed at raising capital for company-specific purposes and/or development projects – through the sale of shares in the case of IPOs and via the sale of virtual coins in the case of ICOs. However, the costs associated with conducting an IPO may reach as much as USD 200,000, while listing an ICO can cost as low as USD 10,000.



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What is the essence of an ICO?

ICOs, as a fundraising mechanism, have become a phenomenon that operates within the decentralized niche of blockchain. The creation of the initial coin offering is simple, given the ERC-20 Token Standard that conceptualizes a significant part of the development process for creating a cryptographic asset. The majority of ICOs accept funds by investors, who can be both individuals and/or organizations, mostly in Bitcoin (BTC) and Ethereum (ETH), via smart contracts that store the funds and at a later stage equivalently distribute the value in the new token.

The restrictions involved with who can participate in an ICO are few, if any, having in mind that the token is, in fact, no security and is not associated with any ownership, voting or creditor rights. Investors can be located in any geographical area, which in fact leads to a global pool of sponsors and raised funds of billions of dollars. One of the fundamental issues with ICOs though is the fact that the asset offered to the mass is at a pre-product stage. This could make the offering quite risky and speculative as well. At the same time, the fundraising is needed to support the development of the project that should be thoroughly described in the company’s White Paper. In the ICO world, a White Paper is a mandatory document that clarifies the technology of a Blockchain project.

The idea behind every ICO is community building through token issuance. Finding like-minded individuals is crucial for the success of a certain coin offering. Users who wish to support the platform and those who are interested in the return on investment at a later stage are usually the main investors in the project. This kind of crowdfunding a project provides access to some scarce resources such as storage space, data sets, and alternative payment methods among others. Moreover, the ICO is a fiscal model that provides economic incentives by using cryptographic tokens, which are stored in wallet software. The value of each token is determined by the value of the company, meaning that all trading activities, such as buying and selling, have a direct impact on its market capitalization.



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How it All Started

The first cryptocurrency fundraising event took place in 2013. Ripple managed to pre-mine 1 billion XRP tokens in exchange for Bitcoin or fiat currencies. In early 2014, Ethereum managed to raise capital of nearly USD 18 million, which was the largest ICO at that time.

The very first fundraising token based on Ethereum was DAO. Its idea was to allow other Blockchain initiatives to get funding. The uniqueness of the project laid in the fact that the platform promised to provide decentralization in terms of governance. Each and every token holder had the right to vote and decide on the future of the token itself. However, due to technical vulnerabilities, the DAO initiative lost more than USD 150 million to an unknown digital thief. The decision taken by the Ethereum Foundation was to create a hard fork and respectively to claw back the taken resources.

Even though the very first attempt to fund a token built on the Ethereum platform failed, Blockchain developers realized the ease of launching a token using Ethereum rather than going through a seed investment round and other venture capital models. To be more precise, the ERC-20 token standard makes it easy for programmers to build their own Ethereum-based cryptographic tokens.