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An Overview of Initial Coin Offering (ICO)

Introduction

An Initial Coin Offering or ICO is a fundraising mechanism which is similar in concept to an Initial Public offering, also known as IPO where both are basically processes by which companies raise capital.

While an IPO investment deals with issuance of securities where investors get to purchase shares of a company, an ICO is an investment that gives an investor a crypto coin in return for investment. This primarily means that someone can offer investors some units of cryptocurrency or crypto-tokens in exchange of either Bitcoin or Ethereum, that the investor already has in his or her possession.

Since 2013, ICOs have often been used as fundraising tools for the development of new cryptocurrencies where the pre-created tokens or crypto coins can easily be sold and traded on all cryptocurrency exchanges but only, if there is a demand for them.

Before digging deep into ICO, it is important to note that investing in an ICO will not result in the investor having an ownership stake of the company that he or she is giving the money to, which generally happens in case of an IPO investment. By choosing to invest in ICO, an investor basically gambles on the currently insignificant cryptocurrency that he or she is paying for, will increase in worth later and then will make money for the investor.

The History and Evolution of ICO

ICOs could be a relatively new phenomenon in the financial sphere but have rapidly become a dominant topic of discussion within the blockchain community. 

They have gained so much popularity in the financial system, that some experts are suggesting they could well become the securities and shares of tomorrow! But before we go into that discussion, it is important to have a historical context of ICO to know how exactly the trend started.

The first cryptocurrency that was distributed by an ICO was Ripple, which was early 2013. Back then, the Ripple labs started creating a payment system called Ripple and created approximately 100 billion XRP token or Ripple cryptocurrencies. Then the company sold these tokens and the fund was used for the development of the platform Ripple.

In later part of 2013, Mastercoin created a new cryptocurrency with the promise of forming a layer on top of Bitcoin to execute smart contracts and tokenize Bitcoin transactions. The developer of Mastercoin then sold some million Mastercoin tokens against Bitcoin which brought him a return on investment of around $1 million.

Since Mastercoin’s ICO, it is estimated that ICOs have raised US$25m in 2014, falling to US$10m in 2015 which was mainly due to Bitcoin’s price collapse in 2014. And in 2016, with an estimated raising of as much as US$225m, ICOs are riding high and strong where the trend is well supported by the hike in the price of Bitcoin. 

A Step-by-step Guide on How an ICO Works

• Pre-Announcement Stage

This is the initial stage of a future project which is primarily carried through websites that are highly frequented by cryptocurrency investors. At this stage of the process, creators of a project prepare a ‘white paper’ which is fundamentally an investor presentation that outlines the details of the project.

The importance of ‘white paper’ is that once it has been circulated, the creator will get a sense of whether there is investor interest in the project proposed by him. This will also give the creator an opportunity to address concerns and risks raised by the potential investors regarding the project. Ultimately it will help the creator reach a final business model which will be the final version of ‘white paper’.

• Offering Stage

This stage essentially deals with that version of ‘white paper’ where terms of contract for the benefit of investors is well laid out on behalf of the creator/company which is entering into the ICO.

The Offering stage will outline the project details and the total amount of required capital along with project timelines. It will also indicate the financial instrument or tokens that will be sold during the ICO to the investors. 

The financial instrument will have a specific value assigned to it, together with the rights of the investor and with the period of expectation after which the creator/company will start returning earnings to investors, traditionally by the way of dividends.

Once the Offer gets signed, the commencing date of the ICO will be announced which in turn, will make the Marketing Campaign move into overdrive.

• Marketing Campaign

This stage is a pivotal component of the ICO as it will primarily help a company or a creator to raise the necessary capital. 

Companies or creators who are generally nascent and unknown, need to bring marketing agencies into the setup in order to make vital presentations. 

The campaign can last up to a month on average where the participants of crowdfunding programs remain to be the main target segment. While investors are generally more willing to back projects, their involvement in the project is considered to be a positive for both the company and other investors as well.

Once the marketing campaign comes to an end, the buying and selling of tokens starts as the company or the creator has successfully established an exchange for investors to acquire tokens or crypto coins.

The Bottom Line

ICOs are trending in the financial system lately as they are incredible new ways of raising money. With innumerable cryptocurrencies coming off-late in the market, everyone is trying to adapt to this new wave. 

If you think you will be able to make a fortune on a promising new ICO, just make sure to do your homework and research beforehand. 

When cryptocurrency is all about high risk and high reward it is important to note that ICOs are no different. 

Reference Links:

https://blockgeeks.com/guides/ico-basics/

https://www.investopedia.com/news/what-ico/

https://www.nasdaq.com/article/what-is-an-ico-cm830484

https://www.fxempire.com/education/article/ico-initial-coin-offering-work-418446

https://blockgeeks.com/guides/initial-coin-offering/

https://techcrunch.com/2017/05/23/wtf-is-an-ico/