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Ever since the cryptocurrencies became popular, one word- ICO has become too popular among the investors and fundraisers alike. ICO is Initial Coin Offering.
ICO is something like an IPO (but pretty much different in many ways which we will discuss) where the organization offers some units of a new cryptocurrency or crypto tokens in exchange for cryptocurrencies like Bitcoin or Ethereum or fiat currency. The tokens are considered to be sold and tradable on cryptocurrency exchanges if there is a demand for them. 80% of the ICO are related to ethereum token, selling blockchain coins.
In simple terms, initial coin offering or ICO is a type of crowd-funding with cryptocurrencies to raise capital, generally for startup companies. ICO coins, ICO tokens and crypto coins are all same terms used for the tokens offered by the companies. Once this token is offered, they are promoted as future units of currency when the project initiates.
The startups get funding without going into the hassles of legal issues and regulatory compliances.
Compared to market dynamics, governments and central banks have been slow in catching on to provide a formal legal framework to the cryptocurrencies and the ICOs. Lately, ICOs have been banned in some countries like China, India and North Korea to name a few.
ICO key characteristics:
• ICO participation involves the investor in a project, Decentralized Autonomous Organization (DAO) or an economy per se.
• Coin ICOs make the investor participate in an economy; token ICOs sell right of ownership or royalties to a project DAO.
• Owning tokens may not give the investor a right to vote on the project management or operations, but they will have input throughout the project lifespan.
• ICOs involve the creation of a defined number of coins or tokens prior to sale (there have been exceptions also).
• ICO coin or token price is decided by the creators of the economy, project or DAO.
• ICOs offer concludes with the trading in the open market.
Though Bitcoin, the first decentralized cryptocurrency was introduced way back in 2009, the first ICO coin offered was Mastercoin in 2013 which garnered $600,000. Ethereum token sale in 2014 has been the most successful ICO coin sale ever. Another ICO worth mentioning is that of a web browser Brave, which generated $35 million in just 30 seconds of the start of the offer. Since then, there has been a wave of new ICOs, especially after the second half of 2017. A record $6 Billion were raised in 2017 by ICO funding.
Most of the Initial Coin Offerings have failed but are still a darling of the investment fraternity. While vetting the ICOs, you cannot distinguish the good from the bad from an investment point of view. Lately, it has become difficult for investors and they have been trapped in scams using ICOs to dupe them out of funds. Due to the controversies and scams associated with them, social media sites like Facebook, Twitter, Google, Bing, Linkedin, Snapchat, Baidu, Tencent, Weibo, Yandex, Mailchimp etc., have all banned their advertisements on their sites.
The ICO tokens have been divided into three types: Asset Tokens (providing access to a product or service), Security Tokens (redeemable by precious metals to real estate) and Equity Tokens (very much like stocks). I shall discuss each type and how they differ from one another in a separate blog. Asset tokens are the most popular which give access to the features of a particular project rather than ownership of the company itself.
Token sale calendars are available and still, ICOs are lined up as per research firm Smith and Crown. Generally, ICOs remain open from a few weeks to a month. There have been instances where they have been open for longer durations and also, fundraising for a particular ICO taking place on multiple occasions, (unlike an IPO which is a onetime event).
The companies mainly are start-ups raising capital for their venture. They can also be used to promote the sale of a service, before introducing in the market with the use of a new cryptocurrency. In such cases, the investors later become consumers of the service offered. The valuation of such tokens is dictated by the demand of the particular product or service.
As already discussed, there are lots of advantages for the companies raising money from Initial Coin Offerings. The biggest advantage is that they are not subject to any regulatory or taxations. Also, the token or coin sale is direct with fewer intermediaries. The success of ICO depends on the issued white paper. I am not at all discussing whether you should buy ICO or not. It all depends on the prospects, your risk appetite and how you anticipate the product/service requirements in the future.
To know more about the Token classification, please read the following post:
I shall also write, about how to create an Initial Coin Offer, coin offerings and tokens more in the coming blogs. I will also discuss the requirements of getting an ICO and how can we be involved in it if we wish to. Till then……
Cheers ! ! !