You might have heard about IPOs (Initial Public Offerings). An IPO is used by a company that is looking to raise funds in order to create a new project. ICOs, or Initial Coin Offering, are the cryptocurrency equivalent of IPOs.
ICOs have a significant advantage over IPOs — they eliminate middlemen from the capital-raising process, allowing companies and investors to communicate directly with one another.
Companies can raise money via an ICO to launch a new project, app, or service. Since the crypto market is projected to hit a whopping $42.69 billion in 2023, a lot of companies are looking to leverage ICOs for their benefits.
What is an ICO?
Using ICO trading platforms, investors get unique crypto tokens in exchange for their capital and investment in the business. It’s a form of crowdfunding using the issuance of tokens.
The token acts like a unit of currency that gives investors access to various features of the project that their business is in charge of. The main benefit of ICOs is that they can help fund open-source software projects since it’s hard to finance them with traditional payment and investment structures.
Even though the initial coin offering is a relatively new concept in the world of cryptocurrencies, it has already made quite a significant impact. Over $6.8 billion was raised in 2018 using ICOs on the blockchain.
The NEO token had a massive ICO launch and received investments from major companies. From an initial token price of around three cents, it reached an all-time high price of roughly $180. Ethereum was also launched via an ICO, with an initial offering price of 30 cents.
How Do ICOs Work?
The ICO fundraising model makes it easier for startups to raise capital by issuing tokens and handing them out to investors in exchange for capital. Tokens are the key to trust and fundraising in ICOs.
Token holders are given various features with which to make decisions. The functions depend on the type of token. Here are the two types of tokens used in ICOs:
These tokens represent ownership and are similar to traditional securities. They grant an investor fractional ownership rights over an asset controlled by a third party.
Utility Tokens do not qualify as securities. Instead, their sole purpose is to be used to access services or products on a specific platform. As a result, these are ideal types of tokens for ICOs.
Utility tokens are built on top of the blockchain and can be used to buy services and items, as well as enable various features within a platform. These tokens usually grant access to a feature or service.
Types of Initial Coin Offerings
There are two types of initial coin offerings – private and public ICOs. Let’s dive deep into what each of these ICOs is and their use cases.
Public ICOs are used to raise investment from the general public. It runs on the democratic model, which allows anyone to invest in a project. Public ICOs create a direct link between the company and investors and make sure that the interests of both parties align together.
Private ICOs incorporate a limited number of investors who can join the investing venture. Most of the time, high-net-worth individuals and well-known investors participate in this process, and the company that they invest in chooses the minimum investment amount.
ICO vs IPO - What’s the Difference?
Both ICOs and IPOs are methods of raising capital. However, the key difference is that ICOs are based on cryptocurrencies, while IPOs are launched by well-established private companies for their products and services.
IPOs sell company stocks, and each investor receives shares of the company for their investment. IPOs go through a rigorous regulatory process, where the companies have to disclose their financial information.
ICOs, on the other hand, are not subject to the same level of scrutiny. which has led to concerns about the potential for scams and fraud. For this reason, China and South Korea have banned ICOs, but other countries, such as the US and Canada, are working to develop a regulatory model for them.
Pros and Cons of ICOs
- ICOs offer high profit potential. You could receive numerous benefits if the price rises at any point during the fundraising process. However, you should do a market analysis to understand if the project would be a good investment.
- Public ICOs are available to anyone, so anyone can become an investor. The regulations aren’t as strict as those for private ICOs, which makes it easier for most investors to participate.
- ICOs offer fast fund-raising along with efficient plans to take a start-up to success.
The Problem with ICOs
- The lack of regulation makes them vulnerable to scams.
- Investors who are new to the world of crypto will need to go through a learning curve to fully leverage ICOs.
- Cryptocurrencies are volatile, which means that there’s always a chance of losing the value of your tokens.
Investing in ICOs can be risky and speculative. There is no guarantee of success. On the one hand, they offer early access to promising projects. However, on the other hand, you also face a liquidity risk. If the project does not take off, it will be difficult to sell your tokens. Before investing, do due diligence, and make sure you fully understand the underlying technology and business model. Keep your investment goals and risk tolerance in mind before investing.