What is ICO? An Initial Coin Offering or ICO is a method via which companies in the cryptocurrency industry raise money to accomplish particular targets. Their goals might include the creation of a new currency or the launch a new service or an app.
The easiest way to understand an ICO is to compare it with an Initial Public Offering or an IPO. An IPO is a method through which traditional companies raise money for expansion and development.
There are a few ways through which a traditional company can grow:
- They can wait for a company to generate profits to be re-invested, making their original owners maintain an absolute control over the company. The only problem with this is, it will take time for profits to accumulate thus slowing down the process of expansion.
- The second and the more important concept in this context is that; a company can raise money from external investors. This makes it easier for the cash to flow in. This is a quick way for businesses to grow but it means that companies often have sacrifice a percentage of ownership in the company. This reduces a bit of risk as well.
- Finally, a company can go public and raise money from common people by selling stocks and becoming a public entity.
The concept of IPO’s and ICO’s is similar but there are a few key points that make them different:
- An ICO is something which is offered by cryptocurrency companies at their nascent stage.
- The startup traditionally creates a whitepaper which sketches out what the purpose of the project is, the need it fulfills, the amount of funds required for its completion, the percentage or the number of virtual tokens which the owners will keep and the method of payment.
- These tokens can be also bought with pre-existing digital currencies. Tokens can be directly compared to stocks or shares because it represents the percentage of ownership in the project/company.
- It might also happen that the owners of the project cannot raise the required funds for the completion of the project within the required. In that case the initial investors will get their money back.
It must be mentioned that after the meteoric rise in value of a few crypto startups, many people might be inclined to invest in ICOs and start trading crypto at Redot.com or other exchanges depending on their portfolio and risk level. They should already have had invested in currencies like Bitcoin and Ethereum to pay for tokens and have a wallet which can hold the tokens bought. Research is key and that’s how to understand which ICO to invest in.
ICO’s vs. IEO’s
We’ve already learnt about what ICO’s are but they are subjected to various risks. People may lose a lot of money on risky investments. Companies might pull off shady activities with money borrowed from lenders. This has made investors sceptical about them. This scepticism is legitimate and companies have responded to this by raising funds through something called an Initial Exchange offering or IEO.
An IEO is something where the funds raised by a startup is looked over by a cryptocurrency exchange like Redot. It is the responsibility of the exchange to carefully examine the white paper and to market them as well. This allows the developers of the crypto startup to focus on product development. It becomes easier for the owners to raise funds and the buyers as well, because they know that the idea has gone through a fair amount of scrutiny.
Few functions of the IEO platform:
- Scrutinizing the white paper
- Judging the team members working on the project. Members with successful portfolios in the crypto market will help the new offering gain recognition.
- Assessing the demand for the particular product and identifying Unique selling points.
The creation of a good whitepaper is crucial in this field because it lets the potential investors understand the problem being solved by the blockchain. The role and the benefits of all stakeholders should be properly justified thus making it easier for investors to make the decision. Summarizing the above paragraph, the three things which makes an IEO better than an ICO is:
- Transparency.
- Rigorous screening.
- Security.
ICO’s vs. STO’s
An ICO is similar to a Security Token Offering/STO because an investor gets a crypto coin which is representative of their investment but the it is different in the fundamental aspect that the security token are backed by assets. STO’s have to comply with regulatory governance unlike ICO’s. Coins which have been acquired through an ICO are framed as utility tokens –
- They give users access to Decentralized Applications and their native platforms.
- They can hence translate legal frameworks and thus easy to launch.
STO’ on the other hand are asset backed or the intention in this case is to give an investment contract under securities law. Platforms will have to adhere to the various laws of the regulatory authorities before launching an STO. In this case, the investors have to pass certain requirements to make the investment. The STOs are similar to ICO’s because both issues tokens on a blockchain.
Who can start an ICO?
Practically anyone with a vision can raise funds for their cryptocurrency startup. If they can put down their technology and explain potential investors the utility and the process through which they are going to achieve their goals, there is a high chance that they can raise money for their project. They should also show how to buy ICO tokens to community
This doesn’t necessarily have to mean that they will end up raising all the money they want in a particular timeframe. It may or may not be successful and that is why it is important to carefully choose the ICO to invest in. But if you are lucky, you can have a good amount in crypto to start crypto trading at a scale.
ICO’s regulations
There is little to no regulation in ICO’s. Once someone is sure about the technology, they have the freedom to go get their money from people who have it. But the lack of regulations means that ICO’s are good poaching grounds for scammers to make money out of. Homework is important and good research allows you to make good decisions. If you think an idea is one in a million, then why not??
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