ICO is an abbreviation for Initial Coin Offering. It’s the cryptocurrency industry’s similar to Initial Public Offering (IPO). An ICO is simply a way of raising funds, and that’s why every company intending to raise funds to develop an app, service, or new coin has to launch an ICO.
Anyone interested in ICO can buy into the offering and, in return, receive a new cryptocurrency token provided by the company. This token is simply a representation of the stake in the company.
How Does an Initial Coin Offering Work?
As said mentioned above, an ICO is a popular method of raising funds to be used by startups looking to offer products and services correlated to blockchain space and cryptocurrency.
Every time a cryptocurrency startup intends to raise funds via ICO, it usually creates a whitepaper defines the details of the project, the purpose of the project, the amount of money required, the exact number of virtual tokens instigators will retain, they type of money that will be allowed, and the length the ICO campaign will take.
During the ICO campaign, anyone supporting the project is free to buy project tokens using digital currency. These coins are also known as tokens and are no different from company shares sold to investors in an Initial Public Offering (IPO).
In case the funds raised are below the firm’s minimum requirements, then the raised funds are taken back to the backers leading to termination of the ICO campaign. If the funds raised within the set time-frame meet the firm’s minimum requirements, then the funds raised are used to support the realization of the project goals.
Other ICO Considerations
Any investor looking to buy into ICOs should have an in-depth understanding of cryptocurrency space. Most of the ICOs sell their tokens to investors with pre-existing cryptocurrencies.
This is an indication that every ICO investor must have a cryptocurrency wallet designed for currencies like Bitcoin and also have a wallet that can hold the token or currency you intend to purchase.
How to Find ICOs to Participate in?
There is no way to stay abreast of the latest ICOs. The only thing anyone interested in ICOs can do to stay up-to-date is to research new projects online. ICOs generate a significant amount of promotion, and there are several places in which investors meet to chat about new opportunities.
There are many sites designed to help interested investors to find new ICOs and contrast the available offerings against one another.
What are the Differences Between the ICO and IPO?
Traditional companies have limited ways of raising funds for development and expansion. Companies that start small are likely to grow with the increase in profits without losing ownership.
This process doesn’t happen overnight; it requires time to accumulate funds for expansion. On the other hand, companies can seek financial support from outside investors in exchange for a portion of companies’ stake. The other way to raise funds is by selling shares to individual investors via IPO.
The IPOs are purely designed for investors, while ICOs are meant for enthusiasts and supporters looking to invest in new projects related to crowdfunding. Crowdfunding differs from ICO in that the funds raised through the campaigns are usually donations.
When it comes to ICO campaigns, the funds are raised by backers who are motivated by possible return on investments. These are some of the reasons why ICOs are known as “crowdsales.”
There exist more than two structural differences between ICOs and IPOs. First, ICOs are not regulated, meaning that they are not overseen by government organizations such as the Securities and Exchange Commission.
The other one is that ICOs are decentralized and unregulated, giving them more freedom than IPOs as long the structure is concerned.
Structuring of ICOs can be done in different ways. Sometimes, a company can choose to limit its funding or set a specific goal, which means that every token sold in the ICO has an already set price, and the entire token supply is regarded as static.
In the other scenario, there is a dynamic funding goal regarding the supply of static ICO tokens. This means that the number of tokens to be distributed to the investors will depend on the funds received, i.e., the more the funds raised in ICO, the higher the token price.