ICO stands for Initial Coin Offering and it’s a way to raise capital for startups that offer new cryptocurrencies. An ICO functions largely, in the same way, an IPO* but without the heavy regulations that normally surround the capital raising game. This has its pros and cons but more on that later.
What happens during an ICO?
Apart from its primary reason to raise capital, an ICO functions more like a crowdfunding project rather than an IPO. This basically means that an ICO is backed by early supporters that want to invest in a new coin and make a possible profit out of it. Unlike IPOs, this makes ICOs more accessible to the general public. The company that initiates the ICO usually publishes a white paper where they explain the basics of the project they are doing and try to convince you why it’s a good idea.
Essentially, the white paper explains what needs the coin is going to fulfill and the market it will cater to. It also includes details about the project, such as duration, capital needed for completion, how much each coin is sold for, and what type of currency is accepted as payment. The startup also set a goal for the money they want to raise, and some campaigns return the money to the backers/investors if the goal is not met. Many projects simply raise as much money as they can and some cap the investments as a certain level. Typically, an ICO accepts payments in other cryptocurrencies, like Bitcoin or Ethereum.
The biggest motivation for a backer of the project is to get the new coin at a discounted price in hope that the project will succeed and the price of the coin will rise. This has been the main hype behind ICOs, especially after the initial backers of Ehtereum made some serious money on the ICO.
ICOs and security
As I mentioned before, an ICO is a deregulated way of raising capital. There are no set governmental rules for an ICO and no requirements to how the company should conduct their business afterward. Comparing to an IPO, where the company becomes public afterward and has to comply with a long list of legal rules and regulations.
There is an ongoing debate around the lack of regulations around ICO, mostly due to numerous scams in the past (just google it and you’ll see). Some praise the freedom startup get to raise capital in a much faster way. Other are not so sold on the idea that anyone can start an ICOs.
As a way to combat the insecurities around backing an ICO, a ton of website that host ICOs have popped up. They promise a screening of the ICO prior to listing them and release of the project funds once a set of pre-defined goals are met.
To back or not to back an ICO?
That seems to be the question. In the grand scheme of things, backing an ICO is like investing in any startup. All of them will tell you that their idea is going to revolutionize the way we do [INSERT ANY DAILY ACTIVITY] but there is really no way to know for sure. Unless you have a clairvoyant in your family, that is going to be the case for most investments you do.
However, the blockchain technology and the cryptocurrencies are very young still, but they have a ton of potential to actually revolutionize industries and change the way we do things. So, if you find a project that you can trust, it might be a good idea to get in on the fun. Afterall, the first supporters of companies like Apple and Microsoft probably felt the same way.
*An Initial Public Offering (IPO) is a term describing the first time a company is selling their stocks on the public market. Typically, this is the most common way to raise capital.