An initial coin offering (ICO) is an event where a company sells a new cryptocurrency to raise money. Investors receive cryptocurrencies in exchange for their financial contributions.
In many ways, an ICO is the cryptocurrency version of an initial public offering (IPO) on the stock market. While it is possible to make considerable profits through ICOs, the lack of regulation makes them extremely risky. In this guide, you will learn all about ICOs, including how they work and some notable examples.
How do Initial Coin Offerings (ICOs) work?
When a company decides to have an ICO, they announce the date, the rules and the purchase process in advance. On the ICO date, investors can buy the new cryptocurrency.
The purchase process usually involves sending money to a certain crypto wallet speak to Investors provide their own recipient address to receive the cryptocurrencies they purchase.
The number of tokens sold during an ICO and the price of the token can be fixed or variable. Here are examples of ways this can work:
- Fixed number of tokens and price: The company sets both up in advance, such as offering one million tokens at a price of $1 per token.
- Fixed number of tokens and variable price: The company sells a fixed number of tokens and assigns a price to them based on the amount of funds it receives. More funds result in a higher token price. If you sell one million tokens and raise $2 million, each token would be priced at $2.
- Variable number of tokens and a fixed price: The company sets a fixed price but does not limit the number of tokens it will sell. An example would be if a company sells tokens at $0.50 each until the ICO is over.
Anyone can launch an ICO. Due to the low barrier to entry, many new types of cryptocurrency are released through this process.
How to start your own ICO
At the most basic level, starting your own ICO is a matter of creating a cryptocurrency token, setting a date, and setting rules for the sale of the token.
To successfully raise funds, there is much more that goes into the ICO process. The most important part is having a cryptocurrency project that people are interested in supporting. You also need to determine how the cryptocurrency you launch will fit into the project. And, during the ICO process, you will need all of the following:
- A technical document describing your project
- A roadmap with short and long term goals
- Market research on other ICOs
- A Web page
- Presence in social networks
- a marketing campaign
With all that an ICO entails, it takes a dedicated team to be successful. You can build a team yourself or work with an ICO company that specializes in these offerings.
ICO versus IPO
ICOs are often compared to initial public offerings (IPOs), a new offering of shares of a private company. Both ICOs and IPOs allow companies to raise funds.
The main difference between ICOs and IPOs is that IPOs involve the sale of securities and are subject to much stricter regulations. A company wishing to conduct an IPO must file a registration statement with the US Securities and Exchange Commission and obtain its approval. The registration statement must include a prospectus that provides financial statements and potential risk factors.
An ICO is the sale of a cryptocurrency, not a security. For that reason, it does not have formal requirements like IPOs. But if a company tries to get around the requirements by running an ICO for something that fits the definition of a security, it could run into legal trouble.
Although both ICOs and IPOs have their risks, IPOs are safer because they are regulated. If you are overwhelmed by all the ICOs out there, the best IPO stocks it’s worth taking a look at as an alternative.
How are ICOs regulated?
ICOs are largely unregulated. In the United States, there are no regulations that apply specifically to ICOs. However, if an ICO fits the classification of a security offering, it falls under the jurisdiction of the SEC and is regulated by federal securities laws.
Some countries have taken a strict stance and have banned ICOs altogether. Countries that have banned ICOs include China, Nepal, Bangladesh, Macedonia, Bolivia, and Ecuador.
Advantages and disadvantages of ICOs
ICOs have their pros and cons. These are the advantages they offer:
- They offer high earning potential if you can determine what cryptocurrency is a good investment. Since you are buying early, prices are often lower and some ICOs offer tokens at discounted prices.
- ICOs are accessible to anyone. Unlike some IPOs, there are no restrictions on who can invest.
- It is a fast and efficient way for startups to raise funds.
These are the disadvantages of ICOs:
- Because cryptocurrency projects are volatile, there is a significant risk that the token will lose value or end up failing outright.
- Lack of regulation results in more scams and mediocre projects. The simple act of ranking upcoming ICOs for a quality project can be like looking for a needle in a haystack.
- Some knowledge of crypto wallets is usually needed to invest in ICOs. For those who are new to crypto, it is often easier to stick to cryptocurrency stocks or exchange-traded currencies.
Examples of an Initial Coin Offering (ICO)
ICOs are an extremely popular way of raising money in the crypto space. Most fail, but there are also the occasional diamond in the rough. Here are some examples of the top ICOs over the years:
- Ethereal: Many cryptocurrency enthusiasts were excited about Ethereum and its programmable blockchain when its July 2014 ICO took place. It ended up raising $18.4 million and later became the second largest cryptocurrency.
- Cardano (CRYPTO:ADA): Cardano improved aspects of Ethereum and had an even more successful ICO. As of January 2017, it grossed $62.2 million. It would eventually rank in the top five cryptocurrencies by market cap.
- Tezos (CRYPTO:XTZ): Tezos raised $232 million through its ICO in July 2017, but it was not a complete success. There were numerous delays in the distribution of the tokens sold through the ICO, leading to a class action lawsuit. Tezos reached a $25 million settlement with all parties in 2020.
- dragon coins (CRYPTO:DRG): There have been many failed ICOs, and Dragon Coins is one of the most prominent examples. As of March 2018, it grossed $320 million. A series of controversies caused an almost immediate price drop when it became available for public listing. In 2021, its market cap fell below $1 million.
Investors are attracted to ICOs by the dream of buying a successful cryptocurrency soon. Although this is possible, it requires considerable research and time to sort through the myriad of upcoming ICOs. Considering the risk involved, it is best to approach with caution.