Initial Coin Offering (ICO): How Does it Work?

Ordinary investors are finding it increasingly difficult to ignore the potential of cryptocurrencies. Many companies trying to attract investment through ICOs promise unbelievable profits to potential investors. But how safe is it? History is known for cases when some tokens have increased in value in a big way. Nevertheless, this market is still highly volatile.

Hi everyone, this is Alex, a researcher of the cryptocurrency world. A couple of years ago, ICOs exploded the information and investment space. However, not even all that glitters is gold. Even from a business and technological perspective, it is not always easy to reliably assess how viable a particular project will be. In this article, I will discuss ICOs, how they work and whether it is worth investing in them.

What is an ICO?

With the emergence of cryptocurrencies, a new form of investment, the ICO – Initial Coin Offering, appeared. The term ICO was formed by analogy with IPO – Initial Public Offering.

In the case of an ICO, a company’s shares are not sold on an exchange. Instead, tokens or cryptocurrencies are offered to those interested in them. In some cases, these currencies and tokens have been developed specifically for collective funding. Sometimes they have little or no value.

ICO is the issue of tokens (cryptocurrency) by a project or company to attract investment. One of the conditions of the ICO is the company’s commitment to a portion of the dividends, such as:

  • Redeeming a part of the tokens sold at a fixed, knowingly higher price than it was on the day of the ICO.
  • Selling its services for tokens at a more favorable price.
  • Another type of bonus that can be beneficial to investors.

Simply put, a company raises money for its project through an ICO borrows from the blockchain community. In a sense, an initial public offering of tokens is similar to launching a crowdfunding service Kickstarter.

How Do ICOs Work?

The ICO scheme is simple: a company wishing to attract investment issues its tokens and sells them to investors. A token is a unit of information storage. The most famous token is the Bitcoin coin of the Bitcoin payment system.

The company issues as many tokens as it sees fit: a million, a hundred million, a billion. The amount is limited only by the ambition of the project. The cost of issuing tokens is almost zero because it is done on a ready-made blockchain platform (such as Etherium or Waves).

Initially, ICO was used for new projects somehow related to blockchain or cryptocurrencies, but now ordinary businesses are also trying to use this way to raise investments. The main objective of an ICO is to sell enough tokens to investors to make the project feasible.

There is only one way to do this: convince investors that the project will grow rapidly and that the tokens they buy will be very profitable in the future. The main advantage of a token compared to a share is that it is possible to buy a token claim. This property has led many small investors to invest in ICOs. There are four types of tokens:

  • Cryptocurrency. The most famous type of such token is cryptocurrencies, such as bitcoins. In essence, a Bitcoin coin is a token of the Bitcoin system.
  • Rights within a blockchain. In this case, a token is like an entrance ticket or pass to the network.
  • Assets in the tangible world. These tokens are more related to the real world. They are issued as if pledged against their products (or services) – a perfectly real, tangible one.
  • Rights in the tangible world. Another type of token is similar to stocks or bonds from the regular economy. Releasing and selling them is not much different from crowdfunding. Only the fundraising is done in cryptocurrency. It is nowadays difficult to get on a crowdfunding platform (there are often strict checks and requirements to have a legal entity and to be tied to a particular state). In this respect, issuing tokens is a little easier and gives more freedom to both those who issue them and those who buy.

Another nuance: when it comes to tokens to raise funds for a project launch or other projects close to the material world, blockchain itself is not always needed. Tokens are sold for cryptocurrencies and then monetized if necessary.

Investing in ICOs

If you want to invest your cryptocurrency in some project, it is very easy to do it on technological platforms: Smith & Crown, ICO Alert, etc. A lot of startups and projects appear every day, and everyone needs money. On the investor side, the process is similar to a bank transfer, which is very easy. The main thing is to get hold of cryptocurrency to become a full-fledged investor.

The problem with ICOs is that there are no mechanisms to regulate them legally. By lending money, you risk losing everything. But do not despair. The U.S. Securities and Exchange Commission (SEC) has recently issued an official warning to market participants that ICOs in the U.S. will be regulated under the securities laws. Thus equating a blockchain ICO to the issuance of ordinary shares.

To determine whether you can invest in an ICO, there is an algorithm “4T”:

  • Team. The staff decides everything. Since we give money on promises, only a good and experienced team can implement them. We study each team member, looking at his successful projects and his experience. There is a joke in the market – if there is Vitalik Buterin (founder of Etherium) in the team – you can safely enter the ICO.
  • Theme. Evaluate how the theme of the project is relevant and whether there will be a demand in the market. Why will people buy the project tokens? You then have to sell them for more than you believe.
  • Technology. This is the central question – why do they need blockchain? Now it is fashionable to add this word to attract the interest of investors to the project.
  • Token. What type of token does the project offer, how do they want to use them, and are you happy with it? An analysis of 226 ICOs was conducted, and only 20 projects used tokens to power the project.

One of the most perspective ICOs was the Telegram ICO (TON) from Pavel Durov. In the first phase, which was open only to large professional investors, collected applications for $3,800,000,000 (although initially planned to collect $850,000,000). However, as we have already written, this project had to be closed due to the ruling of a U.S. court.

Final Notes

We recommend you make weighted decisions when investing in cryptocurrency ICO. Gather any information about the project organizers, analyze the submitted documents for completeness of the information. Ask questions and exchange opinions with competent experts. Think first, invest later – this golden rule is also true for ICOs.

Undoubtedly, cryptocurrencies are the money of the future. It is a world that, thanks to the development of technology, is changing and evolving rapidly. The Artex Global team produces weekly content about the best cryptocurrency exchanges in Australia, the best cryptocurrencies to invest in 2021, and much more. Stay tuned, and don’t miss our articles.

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