What is an Initial Coin Offering(ICO)? Why should You Care?

ICOs or Initial Coin Offerings are a popular way to crowdfund tech startups or cryptocurrency projects. Startups funds their projects using digital coins to attract early investors. Investors who believe in the business idea and management team invest in the business and get digital tokens in exchange.

 
 

Cryptocurrency

 
A cryptocurrency such as Bitcoin, Ethereum, Litecoin and other altcoins(alternate coins) is a digital token designed to be used as a currency or medium of exchange. Cryptocurrencies use cryptography for security and verification of transactions.

Cryptocurrencies support peer-to-peer transactions and encourage transparency. Users can store these digital coins using a digital wallet designed for a specific cryptocurrency. Digital wallets work in-sync with the entire ledger of the cryptocurrency and let the users send or receive more coins. Most of the cryptocurrencies use the blockchain technology for the publicly available digital ledger.

 
 

Blockchain

 
A blockchain is a highly secure digital ledger that can store all kind of economic transactions and it can be distributed publicly without a central organization controlling it. The decentralization aspect makes the peer-to-peer transactions possible without the need of intermediaries such as central banks.

A block is a record of new transactions. Transactions can include anything of value, such as cryptocurrency, medical data, smart contracts, voting rights, etc. Upon completion, a block is added to the chain.

 
To keep the network secure and encrypted, it requires solving complicated mathematical problems. People who solve these problems and adhere to the security standards are called miners. The process of solving these mathematical problems is called mining and that's where new cryptocurrencies come into existence.

 
A blockchain is a publicly available digital ledger. Every transaction is stored in the publicly available ledger.

 
 

Traditional Crowdfunding Vs ICO

 
ICOs work similar to IPOs(Initial Public Offerings) and other crowdfunding forms, but without the control of regulatory bodies. There are no regulations that ensure the fulfillment of promises made by project developers to the investors.

 
 

How Does An ICO Work?

Developers make announcements about launching their project. The first announcements help to generate the interest of the potential investors into their project.

 
After making announcements, developers create a white paper that enlists and highlight the essential features of their project. Whitepapers are created to inform, educate and exhibit the potential of the project. Once they get enough support and encouragement for their project, they go forward with the creation of tokens.

 
New tokens are exchanged for popular cryptocurrencies such as Bitcoin, ETH, etc. Developers decide the limit of the number of tokens they intend to create and the percentage they want to release during the ICO.

 
Developers choose an appropriate time to release the ICO and advertise their ICO on an appropriate platform.
 

Investors learn about the business idea and the management team behind the project. They invest in the ICO to get the advantage of being the early investors as the tokens are released at a very low price during the ICO.

 
 

Pros -

• Efficient Way to Fundraise

ICOs are an excellent way to attract funding for your innovative business ideas. It can save a lot of time to get funding for your projects as compared to traditional methods.

• No Paperwork

To raise funds through IPOs, project developers have to deal with a lot of paperwork which often causes delay and increases the burden on the organization. For an ICO, you need to create a whitepaper and potential investors can take their decision based on the information you provide in the whitepaper.

• Exposure

ICOs generate a lot of hype that gives a lot of exposure to the project. Exposure attracts the attention of a lot of potential investors.

• Early Access

Some tokens have the potential to become highly valuable cryptocurrencies. Investors get the opportunity to invest through the ICO at the right time and get the tokens at a dirt cheap rate.

• Community

Project developers get an opportunity to develop a community around their project. Community gives the project credibility. Community members actively participate in directing the flow of development of the project.

• Incentive

Entrepreneurs and innovators get huge incentives for their projects.

 
 

Cons -

• Congestion

ICO attracts a lot of activity on the blockchain which can cause network congestion and it often results in a heavy backlog. When people see their transactions failing, they start doubting the capabilities of the project developers.

• Intervention by Regulatory Bodies

Governments can start regularizing the ICOs to deal with the ongoing scams and prevent the use of cryptocurrencies for illegal activities. However, intervention by an intermediary such as a government defeats the purpose of cryptocurrencies, which is peer-to-peer transfer and decentralization.

• Speculation

Most of the startups fail and cryptocurrency projects are not immune to it. Investing in ICO means investing in an idea you believe in. After a successful ICO, the cryptocurrency often attracts a lot of speculators which leads to an exponential surge of its price. Heavy speculation around the cryptocurrency makes the cryptocurrency highly volatile and risky.

• Scam

Scammers can create an impressive-looking whitepaper to attract the investors. These scams encourage governmental interference and many people who lose money stop trusting entire blockchain ecosystem.

 
 

Why Should You Care About ICOs?

Though unregulated, ICOs are growing popular and gaining traction. Entrepreneurs are using the power of cryptocurrencies to fundraise their projects outside of the traditional financial system.

 
Cryptocurrencies are the currencies of the future. They have the power to run future technologies such as the Internet of Things(IoT), autonomous vehicles, etc. ICOs will continue to capture the Investor's attention in future.

 
The tokens are listed on the cryptocurrency exchanges soon after the ICO. Investors get a secondary market to sell their tokens. Heavy speculation often inflates the prices of the tokens heavily and multiplies the investment many times in a short amount of time.

 
 

To Sum Up

 
ICOs allow the entrepreneurs to crowdfund their project very efficiently while avoiding the hassles of traditional methods. It also gives an opportunity to early investors to buy tokens at relatively very cheap prices. However, it is important to think of ICOs as a long-term investment and not a mere instrument of speculation.

 
Investors must study the business and market around the service offered carefully. There is an inherent risk associated with ICOs due to the absence of any regulatory body. Investors should read the whitepaper carefully and research about the project developers before investing in a project.