Understanding What Does ICO Stand For…
ICO or Initial Coin Offering is a way of raising funds for different cryptocurrency ventures in an unregulated manner. Investors are provided with some units of a new crypto-token or cryptocurrency in exchange for other cryptocurrencies. Some startups use ICOs to bypass the rigorous and regulated capital raising process associated with venture capitalists and banks. It allows companies to release tradable tokens to raise money for their projects easily.
Several cryptocurrencies have been funded with Initial Coin Offerings. One example of this is Ethereum. In mid-2014, the Ethereum Foundation received almost $20mil for selling ETH against 0.0005 Bitcoin each. This amount has become the capital base for Ethereum’s development.
ICOs can be compared to IPOs (Initial Public Offering) and crowdfunding. A stake must be sold by a startup firm in order to raise funds that will help with its operations. IPO is a kind of public offering wherein the company’s shares are sold to retail investors and institutional investors. In other words, IPOs deal with investors.
ICOs, on the other hand, work closely with supporters who are keen on new projects. Supporters of ICOs are usually driven by the fact that they may get a high return on their investment, which is also the reason why Initial Coin Offering is called a crowd sale and why it is different from crowdfunding. The money raised through crowdfunding is essentially donations.
Firms that are trying to raise funds using ICOs should have a plan on white paper that outlines what the project is all about, what it aims to fulfill, what it needs and how much supporters will get from it. The plan should also state the amount of money that will be required to complete the project, what currency is accepted and how long the campaign will last. During the campaign, supporters of the project will purchase the crypto coins, called tokens, using fiat or virtual currency. When the required amount is raised within a set timeframe, the money can be used to initiate the project. If the target amount is not reached, the money is refunded, and the Initial Coin Offering is considered unsuccessful. Those who support ICOs are mainly motivated to purchase tokens hoping that the project will be successful and they will get more returns from it after launch.
Investors, however, still need to be careful since some campaigns can turn fraudulent. If they lose funds, it will be hard to get compensation. This is because ICOs are unregulated. The tokens are sold not as financial assets, but as digital goods. As such, some regions don’t allow the use of ICOs. Some jurisdictions are trying to regulate ICOs. When ICOs are regulated, investors could face some legal and financial risks. The effort and cost to abide by new regulations could also reduce the benefits of ICOs compared to traditional funding methods. Investors should buy tokens only from trusted sources.