What Are the Benefits of an Initial Coin Offering (ICO)?
ICO stands for initial coin offering; it is a new prominent way to raise money for startup companies by selling cryptos. As cryptocurrencies became prevalent in recent years, numerous initial coin offerings (ICO) have popped up. In the past few years, many startup companies used initial coin offerings and raised a large amount of money. Now, to get to know this new phenomenon in the world of technology and find out the reason that it is getting noticed more and more every year, keep up reading this article. After finishing this article, you will know all about it.
The history of ICO (Initial Coin Offering) goes back to 2013. Mastercoin is a digital currency and communications protocol layer that held the first ICO and raised almost $600,000. It was for creating a Bitcoin exchange and transaction platform. After the successful capital raising of Mastercoin in 2013, many companies embraced the idea and started their own ICOs.
ICO is a fundraising activity that is as same as an initial public offering (IPO). An IPO is when a company releases its stock on the stock exchange, and people who are interested can purchase shares in the company for a specific price. In this way, they will be a partial owner of the company, and in case the company does well, the value of their shares increases, and they can yield a profit over it.
The difference between these two concepts is that ICO uses cryptocurrencies, and it is not as regulated as IPOs. Also, it does not provide investors with shares of the business. Instead, it offers cryptocurrencies to investors. Startup companies use ICOs and give the investors cryptocurrencies or crypto tokens in exchange for their investments, to raise capital for their Blockchain-related projects. It makes the company and investors connected directly without any mediators in the capital-raising process.
Basic concepts you need to know
Tokens are the coins that are offered in an ICO project. These tokens are like the purchased shares in an IPO.
A cryptocurrency is a secure form of digital money that uses cryptography for security. It does not exist in a physical form like a coin or paper money. Although we can transfer or make payments digitally with traditional currency today, cryptocurrency works a bit differently. Cryptocurrency is based on Blockchain technology that makes faking or double-spending impossible.
So how is this cryptocurrency different from the traditional currency or Fiat money?
The main difference is decentralization. It means that no single authority, such as a central bank, can interfere or manipulate the balances. The accounts are under control by their users and complex protocols, not by the central banks or other regulatory authorities. So there is no chance of freezing the account or denying access to it. The funds are always secure and completely under the control of users.
Blockchain is an information recording system that makes faking or alteration almost impossible. It is a digital transaction ledger that is public to the entire network of computer systems. Each of the blocks in the chain holds several transactions along with their corresponding information. Blockchain is a type of Distributed Ledger Technology (DLT). DLT means a decentralized database that is controlled by many participants. Every transaction in Blockchain has an immutable cryptographic signature. This signature is called a hash.
How does It work?
Whenever a company or a startup intends to hold an ICO to raise capital, it publishes a whitepaper. This whitepaper is a document that outlines some major details and information about the project that is taking place. This information may include the main concept and goals of the project, the amount of money that is needed for this project, things that happen after the project completion, types of currencies that are acceptable, how long the project will run, and some other useful information that can help the investors to decide whether they want to invest in the project or not.
After that, the ones who want to be part of the project can buy some of the company's cryptos with fiat money like US dollars, euros, or a different digital currency. These cryptos are referred to as tokens. This process is similar to IPO, where people buy shares of a company to invest in it and be a shareholder of that company.
Otherwise, If the company raises enough money to pursue the project goals, the ICO project will be considered successful. In this case, the value of the investors' shares will increase, and they will benefit from this investment. Contrarily, if the company does not do well, they have to pay the funds back.
Initial coin offerings have extensive benefits for founders as well as investors. Here we can find out some of its advantages.
1. More liquidity
Lack of liquidity is the biggest problem in investments. ICOs enable higher liquidity and more fluidity of funds than company shares by using tokens. These tokens have value even at the moment they are purchased. In this way, investors have the opportunity to make considerable gains quickly.
2. Anyone can join
Anyone can buy the tokens and even sell them to anyone internationally and take advantage. Participating in ICO projects is not limited to just some accredited investors. Besides, you can invest any time you want. You can be one of the early contributors by being watchful enough to purchase tokens as soon as the launch.
2. No geographical barriers
Since ICOs use cryptocurrencies, they are available for anyone everywhere in the world. It is all about global accessibility. Startups can raise funds from wherever they are and from whoever they want. There are no geographic boundaries.
4. Low competition
Initial coin offering is a new concept in the business and technology world, so many people are not familiar with this method yet. They still use traditional fundraising methods for their projects. This means there is still no high competition in this area.
5. No middleman
As you purchase cryptos in ICOs, there are no intermediaries between you and the person you want to sell the tokens to. You can buy the cryptos you purchased as soon as they are created and sell them immediately. The price of tokens can vary; this means there is a great chance of making a considerable profit.
Is it free for everyone to launch?
YES, it is. Since there is no strict regulation on ICOs, anyone can try to get their currency funded. But when we say anyone is allowed to do this, it does not mean that it is easy and guaranteed. You have to consider some important things while doing that. You or other people who are about to work with each other have to research and get information about this business. Understanding Blockchain and cryptocurrency are required. It is better to work with people who have related experience and can help you with it, someone who can tell if it is a good idea for you or not. After deciding to do it, you can go on and create a whitepaper for your ICO. This part is so important. Every detail about your currency and your innovative idea has to be mentioned in it.
Is it safe?
Due to the lack of regulations in cryptocurrencies, investing in ICOs must be done thoughtfully. Although it seems an incredible opportunity, there are significant risks involved, and it is not easy to identify scams. The project progress is not fully transparent, and you do not know how exactly it is going. There is no guarantee to return your funds if it does not go as expected. Besides, you have to make sure that the company and its team are experienced enough to fulfill their promises. Due to the price volatility of cryptocurrencies, the investment in them is also unstable. The most important thing is that there is always a potential risk that the project being a total scam. Therefore, before any investment, it is necessary to research the startup company you are about to deal with and find out if it a legitimate one or not. To do that, you can ask the people you find reliable or contact the company itself. It is better not to trust the company chatrooms or forums because they can pay people to write positive reviews. Also, do not trust the company's ads. As mentioned above, there are no proper regulations in ICO projects, so anyone who intends to invest in it should be very cautious to make the right choice. However, this absence of regulation may not be permanent. Since cryptocurrency is getting more attention day after day, the ICOs, as well, will be an essential way of fundraising. In this way, governments will attempt to implement some legal arrangements to make initial coin offerings as reliable and transparent as IPOs.
Which ICOs are safe to invest in?
In order to find out which ICO campaigns you can participate in, the tips below may help you. Hence, before deciding to invest in any project, it is better to consider the following tips:
- Not providing a roadmap
A legit startup always makes plans for its future. So if they are not sharing any details about their plans, they may not have a plan at all.
Reviewing a project's code is a proper way to make sure it is legit. To let everyone review the project's code, valid projects will share their code on Github. So if there is no code, then there is no project.
- Using money
As an investor, knowing how they are using the money raised from their ICO, is of utmost importance. If the project is not sharing any details about how they are going to use the money, they may not be reliable.
- Not publicizing their team members
Not knowing who is working on the project or whether they have a relevant background or not is something that needs to pay attention to, because scams do this to make it difficult for you to verify related people to the project.
- Too good to be true
If they offer you a project with insanely high profits or impossible products, you better think twice about that project because there is a chance that it is a scam.
Media activity can help you authenticate the project. Projects usually create an active community, and they do so by hiring professional marketing experts. You can also check quality publications for mentions since positive mentions mean that the project is more valid.
If the project is valid, then they probably have competitors. So, find out if there are any competitors and how different or better they are doing compared to their competitors.
Some successful ICOs
1. Sirin Labs
While smartphones are one of the most used technologies nowadays, they are not the most secure. Sirin Labs was planning to solve this problem by becoming the world’s leader in secure open-source consumer electronics.
In just one day, Sirin Labs ICO managed to collect over $100 million, and within eight days, the total worth of digital tokens went up to $157.8 million by a $57.8 million increase. As a result, the demand for the company's proprietary token was increased. Although Sirin Labs' achievements were extraordinary, it is not the most successful ICO.
Bancor is Blockchain-based like Filecoin, and it is a prediction market. Its unique features caused Bancor to be a successful ICO. One of the things that make Bancor special is that it allows conversions into other tokens by creating liquid tokens that measure their price. For example, you can buy a Bancore token that is half Ether and half Litcoin. In terms of being successful, Bancore collected $153 million in cryptocurrency before the ICO was closed.
Filecoin is trying to revolutionize data storage. Like most ICOs, Filecoin is based on Blockchain technology. It provides a decentralized storage network for the users that allows them to share their storage in exchange for Filecoins or other rewards. Filecoin achieved collecting $135 million in multiple currencies due to its interesting nature and features in the first hour of its activity. But that was not the end. Filecoin reached $257 million in sales after that.
Since you have understood what ICO is all about by now, you can better determine whether you want to give it a try or not. As mentioned before, it suffers from a lack of reliable regulatory approval, so before taking any actions, be cautious, and do enough research. It is good to have in mind that cryptocurrency and ICOs are just about high risk. Despite the potential downsides to initial coin offerings, do not forget the numerous advantages it offers.