Initial coin offering (ICO), which is sometimes referred to as “initial currency offering”, is simply a method of funding using digital assets like cryptocurrencies. It is a form of raising a small amount of money from a large number of people. Companies use it to raise funds to create a new coin, app, or service.
When it comes to ICO, several cryptocurrencies are sold as tokens or what is usually known as “coins” to investors to exchange for more stable coins like Bitcoin. In the case of successful launching of the project, the tokens can be promoted as functional units of currency provided the ICO’s funding goal is accomplished.
ICO is usually related to cryptocurrency or blockchain space. They sometimes have utilities for a software service or product offer. To participate in an ICO, you need to learn how to use cryptocurrency wallets and exchanges to purchase these cryptocurrencies.
ICOs are valuable and considered a source of capital for most startup organizations. They enable startups to avoid all the rules and regulations that hinder them from seeking investment or funds directly from the public and intermediaries such as banks and stock exchanges. Most of these platforms, like venture capitalists, banks, and stock exchanges, involve thorough scrutiny and some percentage of shared benefits or shares.
However, ICOs may not be in line with some regulations depending on the nature of the project, possibly being restricted or banned in some regions like South Korea and China.
Some people usually use ICOs to carry out fraudulent activities due to the lack of rules and enforcement of securities laws. Less than half of all ICOs survive the past three months after the offering, while about half of ICOs sold in 2017 were not successful by February 2018, but despite this and the falling prices of cryptocurrencies, a record of $7 billion was raised via ICO from January–June 2018.
The first token ever sold was held by Mastercoin in July 2013. Through ICO in 2014, Ethereum raised money worth a value of 3,700 BTC in its first 12 hours, which equals an approximate $2.3 million at the time.
In 2017, ICOs and token sales became popular, with a minimum of 18 websites tracking ICOs before the middle of the year. In May, the Initial Coin Offer for a new web browser called Brave generated about $35 million in under 30 seconds. In September 2017, messaging app developer Kik’s ICO was able to generate about $100 million.
At the start of October 2017, ICO coin sales worth $2.3 billion had been generated during the year, more than ten times as much as in all of 2016. There were about 50 offerings a month during November 2017 but the highest-grossing ICO took place in January 2018 when Filecoin generated $257 million (and $200 million of that within the first hour of their token sale).
ICOs are also called “token sales”. It was described as “a symbol of ownership interest in an enterprise—a digital stock certificate” by a crowdfunding and syndication lawyer, Amy Wan. he stated that they are likely to be subjected to regulations as securities in the U.S under the Howey test.
As of February 2018, Ethereum was regarded as the leading blockchain technology for ICOs with a record of 80% market share. Tokens are generally based on the Ethereum ERC-20 standard.
On January 30, 2018, Facebook shocked everyone when it banned advertisements for ICOs including all cryptocurrencies and binary options. By April 9 of the same year, other social media platforms like Twitter, Google, and MailChimp had completely banned any form of ICO advertising on their platforms.
Facebook turned a new leaf when it announced to reopen approved advertisers on June 26, 2018. Efforts are underway to use ICO technology to represent regulated securities, referred to as Security Token Offering (STOs), Digital Security Offerings (DSOs), and when listed on a regulated stock exchange, tokenized IPOs.
As a mechanism for scams: ICOs are very useful because they can be used for legal activities such as corporate finance and charitable fundraising but they have been used for some fraudulent activities lately. The Securities and Exchange Commission (SEC) has warned investors to be wary of fraudsters using ICO in order to generate interest and drive up the value of the coin with the aim of dumping it to make a profit.
The UK Financial Conduct Authority has warned that ICOs are very high risk and speculative investments, are scams in some cases, and often offer no protections for investors. Even in cases of legitimate ICOs, funded projects are typically in an early and therefore high-risk stage of development..
LinkedIn, MailChimp, and Snapchat have limited companies from marketing ICOs through their social media platforms. Founder of Wikipedia, Jimmy Wales stated in 2017 that “there are a lot of these initial coin offerings which in my opinion are absolute scams and people should be very wary of things that are going on in that area.”
Baidu, Tencent, and Weibo, which are popular Chinese internet sites, have also disallowed any forms of ICO advertising on their platforms. The Japanese platform Line and the Russian platform Yandex have similar prohibitions.
Several warnings have emerged from the UK Financial Conduct Authority informing the public about ICOs as very high risk and speculative investment. Even with legitimate ICOs, funded projects are typically in an early stage and thus they come with an element of risk during this developmental stage. The European Securities and Markets Authority (ESMA) has also noted the risk that comes with ICOs and the risk that investors may lose all their investments.
After a suggested boom in cryptocurrency prices that gained momentum in December 2017, the regulation of cryptocurrencies has been rapidly changing. These changes are a result of incidents of cybercrime, trading halts, and possible market manipulation.
Cryptocurrencies are based on distributed ledger technologies enabling anyone to buy or transfer their digital asset holdings to any other person without the need for an intermediary (third party) or to update a central record of ownership. Cryptocurrencies can be transferred easily across national and jurisdictional boundaries. This makes it impossible for the government or any authority to control and monitor the ownership and movement of holdings of cryptocurrencies.
Several countries have different ways on how they regulate cryptocurrencies. This regulation also depends on the nature of the cryptocurrency itself.
From a regulatory standpoint, there are two main types of cryptocurrencies: utility tokens and asset-backed tokens. Utility tokens may have value because they enable the holder to exchange the token for a good or service in the future, such as Bitcoin.
Asset-backed tokens may have value because they have underlying assets to which the token owner can attribute value. It is not yet ascertained whether utility tokens require regulation in many countries, but there is a higher probability that asset-based coins need regulation.
This condition makes it very difficult for the issuers of cryptocurrency to analyze which countries are receptive to buying their coins and for the prospective buyers of cryptocurrencies to understand which regulations, if any, should apply.
- Initial Coin Offerings (ICOs) is usually a method of generating funds by most startups willing to provide products and services, usually related to the cryptocurrency and blockchain space.
- ICOs are like stocks, but they can have a use-case for a software service or product offered.
- Many investors have gotten massive yields from some ICOs, while others have turned out to be scams or have not been successful.
- As starters, you need to have a digital currency and have a basic knowledge and understanding of using cryptocurrency wallets and exchanges.
- It is important to note that most ICOs do not have any regulations guiding them, and therefore investors must exercise caution and do their research before investing in them.
HOW TO AVOID LOSING MONEY IN ICO’S
- Make sure project developers have clearly and concisely defined goals in their whitepaper.
- There must be 100% transparency from the company launching the ICO. Investors should know the developer.
- Research on the regulations guiding the ICO.Make sure that ICO funds are saved in an escrow wallet.
- An escrow is a wallet that requires multiple keys to be accessed. This wallet protects users against scams, particularly when a neutral third party holds one of the keys.
How an Initial Coin Offering (ICO) Works
When a cryptocurrency startup wants to generate money through ICO, a white paper is usually created that highlights the details of the project, the problem the project will solve when it is completed, how much capital is required, the type of money required, how many of the coins the founders will keep, what type of money will be accepted, and the duration of the project campaign.
During the project campaign, enthusiasts and other people who strongly believe in the project will buy some tokens with fiat or digital currency. These coins are also called tokens and are similar to the shares people buy from a company during an Initial Public Offer.
Sometimes the money raised may not be enough to cover the cost of the project. At this stage, the money raised may be returned to the investors. In situ funding requirements can be achieved within the proposed time frame, the money generated will be used to pursue the project’s goals.
EXAMPLES OF TOP ICO’S
- Storj: is the first blockchain-based cloud storage company that enables its users to rent out excess storage space, creating a new marketplace.
- The DAO (Decentralized Autonomous Organization): The DAO’s objective was to create a decentralized venture capital fund influenced by its investors. The idea was great, and investments in the company showed this via its ICO, which had a turn-up of $152 million worth of Ether by May 2016.
- Sirin Labs: They provide services by solving security problems in smartphones and other electronic devices. They are the world’s leader in secure open-source consumer electronics, bridging the mass market and the blockchain economy.
- Filecoin: Filecoin uses blockchain technology to create a decentralized data storage network that allows users access to their servers and share their storage in exchange for free tokens and other benefits.
Advantages of Initial Coin Offerings
Some of the benefits of investing in Initial Coin Offering (ICO) are as follows:
- It is a great means for people to save or invest their cryptocurrencies
- It gives room for any individual to purchase tokens and sell them anywhere around the world
- It avails an individual the possibility of getting good returns on investment
- There is less difficulty to entry
- ICO tokens can be used to enjoy newly developed services.
- Tokens can be invested directly in any start-ups or projects that you are convinced about
- There are no intermediaries when it comes to buying and selling coins
How to find an ICO?
One of the best and fastest ways to learn about ICOs is by finding information on the official website of the company launching the ICO. However, it is often a difficult task for people to keep track of which organization will do ICO in time.
Moreover, ICOs are usually implemented by smaller organizations which makes it difficult to get or know them. Therefore, it is advisable to learn to use a comprehensive website that summarizes the latest news and information on ICO.
A representative website that summarizes the latest ICO information is as follows.
- Foundico Blog
- ICO bench
- ICO watch list
- Base rank
- Kyber Network | Medium
- ICO drop
- Foxconn BC
- ICO Insider
- Coin Ninja
ICO no doubt represents a good way for projects to raise funds and investors to have value for their investments. Despite the benefits, you should note that cryptocurrencies remain volatile and it is important to take some steps before investing in an ICO.
An important aspect is studying the whitepaper of the project before investing. Whitepaper provides details on the project, what they intend to do and how the token will function. Additionally, you can read up on the company’s background and the founding team behind the project. These steps will help improve your chances of getting a great return on your ICO investment.