One of the biggest events in the crypto world is ICO. You are saying what is ICO? Well, ICO is the abbreviation for Initial Coin Offering.
This is not a crypto token or coin but one of the processes by which a coin is being launched. Several crypto projects like Ethereum, Cardano, etc had their ICO before becoming a giant in the industry.
In this post, we’ll learn about Initial Coin Offering (ICO) and how it works.
What is Initial Coin Offering?
An initial coin offering (ICO) also known as an initial currency offering is a form of funding using cryptocurrencies. It is a popular way to raise funds for products and services usually related to cryptocurrency.
A company seeking to raise money to create a new coin, app, or service can launch an ICO as a way to raise funds. Investors or speculators buy these tokens or coins in exchange for fiat currency or other generally accepted or stable crypto assets.
The tokens/coins are promoted as future functional units of currency if or when the ICO’s funding goal is met and the project successfully launches.
The token in question may have some utility related to the product or service that the company is offering, or it may just represent a stake in the company or project.
ICOs can allow startups to avoid regulations that prevent them from seeking investment directly from the public, and intermediaries such as venture capitalists, banks, and stock exchanges. They may also fall outside existing regulations. This may depend on the nature of the project, or be banned altogether in some jurisdictions.
How Does It Work?
Initial Coin Offering (ICO) may come after seed sales and private sales for some crypto project start-ups. The ICO process can then be structured in three different ways with its aim to raise funds for the project.
A company can set a specific funding goal or limit. This means that each token sold in the ICO has a preset price, and the total token supply is fixed.
In another way, an ICO can have a static supply of tokens and a dynamic funding goal. This means that the amount of funds received in the ICO determines the overall price per token.
ICOs can also have a dynamic token supply but a static price, meaning that the amount of funding received determines the supply.
The crypto project’s whitepaper is also created which gives the potential investors details about the project. Here, investors can know what’s in for them if they put their money into such a project.
Investors can generally use legal tender or digital currency to buy new tokens. Bitcoins, Ethereum, and USDT are the most common form of cryptocurrency used.
The ICO is not successful when the minimum amount required by the company is not met. In this case, all of the money raised may be returned to the project’s investors.
If the funding requirements are met within the specified period, then the money raised is spent in pursuit of the project’s goals. It is deemed successful this way.
Things Investors Need to Know Before Participating in Initial Coin Offering (ICO)
Here are some tips for investors who are looking for projects to invest in at the initial coin offering phase.
1. Do your research– If you’re going to invest in cryptocurrency, it is very important to understand the industry. Do your research on the token, and project, and keep yourself abreast of the happenings in the market.
2. Study the whitepaper– This is where you can get to know more about the project. From the whitepaper, you’ll know what the project is about, the need that the project would fulfill upon completion, and how much money the project needs.
You’ll also get to know how many of the virtual tokens the founders will keep, what type of payment (which currencies) will be accepted, and how long the ICO campaign will run.
3. Beware of scams– You’ve to beware of fake projects if you’re investing in cryptocurrency. Fraudsters often try to take advantage of the numerous beginners who have yet to have full knowledge of the industry. They may lure you with a huge return on investment. This may come through emails or text.
4. Check that ICO funds are stored in escrow wallets– This type of wallet requires multiple access keys, which provides useful protection against scams. You just have to do your homework on this to be assured that you are raising funds for fraudsters.
Risks Associated With Initial Coin Offering (ICO)
As it is with most crypto endeavors, the stage of initial coin offering is not without risks. The main risk is that there are fake companies/projects out there. Due to the lack of regulation and enforcement of securities law, ICOs have been the vehicle for scams and fraud.
In this case, someone might do whatever it takes to make you believe they have a legitimate ICO—and then abscond with the money. Of all the possible avenues of funding, an ICO is probably one of the easiest to set up as a scam.
Anyone can launch an ICO which makes it an easy way to rob people of their hard-earned money if investors don’t do their homework.
Another risk associated is a bubble. Some investors have flooded into ICOs in hopes of participating in financial gains of similar size to those enjoyed by early Bitcoin or Ethereum speculators.
The Bottom Line
Initial coin offering [ICO] is one of the phases in the launch of a crypto project. This is done via funding and once the amount for the fund is met, the crypto token or coin is successful. ICO is however not without risk like every crypto endeavor, so care must be taken when involved in this process.
