What Is An ICO? (Complete Beginner’s Guide)
The huge surge in cryptocurrency and blockchain is helping boost the need for many startups and individuals to look into ICOs. For instance, in 2017 ICOs helped several people raise up to $7 billion and that figure doubled in 2018. In fact, Telegram took it higher by single-handedly raising $1.7 billion.
ICO is an acronym for Initial Coin Offerings, an offering that many industry experts expect will become a multi-trillion-dollar space. In fact, the market values over $100 billion., which has made it attract several traders including those who only want some form of quick cash as long as it does not have so many regulations.
What is ICO?
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An Initial Coin Offering is an activity in cryptocurrency that allows you to raise capital. It is a form of an initial public offering that uses cryptocurrencies. Only that this time it is more than IPO but it is used mostly by startups to raise capital. The good thing about ICOs is that you get intermediaries in the capital-raising discussion and get to create direct connections between your company and investors.
In ICOs, investors receive a unique token that is used as an exchange for monetary investment in the business. The ICO coin is also a sort of currency that gives the investor access to specific features of the early-stage cryptocurrency project created by the issuing company.
Startups can also use it as a form of digital crowdfunding such that they can raise funds without letting go of their equity and still be able to establish a community of incentivized users that are interested in the success of the project.
Types of ICO
There are majorly two types of initial coin offerings — ICOs. They are:
Public ICOs
Private ICOs
Public ICOs
Public initial coin offerings are a form of crowdfunding that targets the public. It is a form of investing that is democratized because anyone has the access to become an investor.
Private ICOs
In the case of the private initial coin offerings, only a specific round of investors are allowed to participate in the process. The investors are often accredited, that is they are registered to a certain financial institution and are of high net worth. If it is a company, it must have a minimum investment amount to participate.
How Does It Work?
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The main deal with ICOs is to leverage decentralized systems of blockchain technology that will align with the interests of various stakeholders. Some of the steps involved in ICOs are:
Identify the Investment targets
The first thing you must do is to understand the intention for raising the capital. Also, I drift the target of the fundraising campaign and create relevant materials about the project.
— Create Tokens
The next thing to do is to create your token. Tokens are representations of an asset; hence they are often fungible and traceable. However, don’t confuse tokens with cryptocurrencies because they are two different things. Tokens are representations for the owners to help them know how much they have at stake in a product or service created by the company.
How do you get your token?
The token is often designed by specific blockchain platforms by making minor modifications of their code to create the specific token for the company.
— Promotion campaign
After the company must have identified their target and created a token, the next on the list is to create a campaign that can attract investors. The campaigns are mostly executed online to help them reach a large pool of investors. However, you must know that Facebook and Google, two of the largest online platforms have banned any sort of advertisement of ICOs.
— Initial offering
After you must have created the token and made an offer to the investors, the company will go ahead and use the proceeds from the ICO to create their project while the investors expect returns from the token.
Risks of Investing in ICOs
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Just like many cryptocurrency ventures, ICOs are one of the high-risk guys. The market is highly under-regulated making it a breeding ground for scams and fraudulent activities. In 2018, at least 80% of the ICOs transactions were believed to be fraudulent.
Hence, if you are looking to venture into ICO, make sure to put in the effort:
Reviewing the project’s team to see that it has demonstrable experience in creating successful businesses.
Reviewing the white paper and roadmap attached to the project to determine if the project will work
Checking to see if any computer code has been audited by a third party. Also, check for typos, if you find a lot of them, that could be a red flag that the website could be a scam.
When you learn about ICOs, you’ll see how they are for startups to raise funding to build projects without institutional bottlenecks. However, a lot still needs to be done with some decentralization regulatory procedures to reduce the risk of scams in the ecosystem.
