Initial Coin Offering (ICO) by Jake Frankenfield

TL;DR - Definition, explanation, pros and cons, and examples of an Initial Coin Offering (ICO)

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Tags - initial coin offering, ICO, initial capital, pros and cons of initial coin offerings, financing, creative funding strategies, ICO scams, blockchain

Questions answered:

  • What is an Initial Coin Offering (ICO)?
  • How do Initial Coin Offerings (ICOs) work?
  • How do Initial Coin Offerings (ICOs) differ from Initial Public Offerings (IPOs)?
  • What are some things investors should keep in mind when buying into Initial Coin Offerings (ICOs)?
  • What are the advantages and disadvantages of Initial Coin Offerings (ICOs)?
  • What are some examples of Initial Coin Offerings (ICOs)?

Summary:

  • An Initial Coin Offering (ICO) is the cryptocurrency industry’s equivalent to an Initial Public Offering (IPO).
  • A company looking to raise money to create a new coin, application, or service can launch an ICO, into which interested investors can buy and receive a new cryptocurrency token issued by the company.
  • The cryptocurrency token may have utility for the company’s software product or service, or it may just represent a take in the company.
  • To launch an ICO, a cryptocurrency startup usually needs to create a whitepaper outlining what its project is about, how much money it needs, what type of money it will accept, and how long its ICO campaign will run for, etc.
  • Once the ICO campaign begins, interested investors buy some of the project’s tokens with fiat or digital currency.
  • If the money raised does not meet the minimum funds required, the money may be returned to the investors and the ICO is deemed unsuccessful.
  • In most cases, tokens are purchased with pre-existing cryptocurrencies; interested investors will need to already have a cryptocurrency wallet set up for a currency like Bitcoin or Ethereum as well as having a wallet capable of holding whichever token they wish to purchase.
  • ICOs are largely unregulated and therefore are much freer in terms of structure than IPOs, but the Securities and Exchange Commission (SEC) can always intervene.
  • While IPOs only deal with investors, ICOs may deal with supporters who are keen to invest in a new project - like crowdfunding.
  • However, ICO investors seek for a prospective return on their investments unlike many crowdfunding donors; ICOs are therefore called “crowdsales”.
  • In some cases, a company sets a specific goal for its funding; each token sold has a pre-set price and the total token supply is static.
  • In some cases, the token supply is static but there is no specific goal set for the amount of funding; the more the total funds received, the higher the overall token price.
  • In some cases, the token supply is dynamic, determined by the amount of funding received; the token price is static, but the token supply is unlimited.
  • Advantages:
    • (For founders:) It is easy for a company launching an ICO to create tokens; there are online services allowing ICO managers to generate tokens in a matter of seconds.
    • (For investors:) If a company’s plan/project succeeds after its ICO launch, the value of tokens purchased by investors will climb above the original price during the ICO; ICOs have the potential for very high returns)
  • Disadvantages:
    • (For investors:) Due to their unregulated nature, ICOs are rife with fraud and scam artists and funds that are lost due to fraud or incompetence may never be recovered; investors must exercise a high degree of caution and diligence.
  • Ethereum’s ICO in 2014 was an early pioneer, raising $18 million in 42 days
  • Etheruem was priced at around $0.30 when it debuted but it trades at $185 as of Nov. 4, 2019.
  • Antshares (later rebranded as NEO)’s two-phase ICO raised about $4.5 million and provided exceptional ROI for its early investors ($0.03 during the ICO to $10.74 at its peak).
  • Filecoin, a decentralised cloud storage project, raised $257 million during its one-month ICO ending in Sept. 2018.
  • More recently, Block.one (EOS platform) raised $4 billion (biggest ICO).

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