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What is an Initial Coin Offering (ICO) Explained

What is an Initial Coin Offering (ICO) Explained

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What is an “Initial Coin Offering” abbreviated as ICO? An ICO is a means by which start-ups raise venture capital without having to resort to banks or venture capitalists.

With the initial campaign of offering the coins, the start-ups usually offer a preferential rate to the early supporters of the venture.  This occurs either by selling their tokens or coins at a discounted rate or by giving away free coins.  These coins can later be exchanged for FIAT currencies or other cryptocurrencies like Bitcoin or Ethereum.

At the time of writing, ICO’s are still a largely “unregulated” means of raising funds for any cryptocurrency business venture.  That is not to say that an Initial Coin Offering is not legitimate.  It simply means that so far, there are no financial regulatory bodies that have structured a written legal framework within which ICO’s can operate.

What is an Initial Coin Offering – Explanation

Whenever a start-up wants to initialize raising capital through an ICO, it usually draws its plan on what is known as a “white paper”. The white paper for any ICO is the roadmap in which the project is detailed.  Basically, it maps out the reason for which the funds are being raised.  The white paper details the target dates for completion of the project.  It envisages how much capital needs to be raised in order to reach the targets for the venture. Furthermore, the white paper for a legitimate Initial Coin Offering explains how much of the tokens are going to be reserved for the developers of the project.

There are also other details in the White Paper.  These could vary from one ICO to another.  However, they can include what type of payment is accepted for the tokens and the time frame in which the project will run.

When a new Initial Coin Offering is launched, the public will receive tokens (aka digital coins). The value of which is similar to a shareholding in an IPO (Initial Public Offering).

If for some reason the target funds are not raised during an ICO, the money is returned to the supporters of the project (or backers or investors – whichever way one would like to call them) and the ICO is considered to be failed.

If on the other hand, the target capital is reached during the Offering time, then, in that case, the funds are used to develop the business plan that is set out in the White Paper and to complete it.

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Why Should You Invest in an Initial Coin Offering?

Initial Coin Offering

The backers or investors in an ICO are usually individuals or Corporations who believe in the underlying project of the ICO.  However, that is not enough.  Successful operations do translate into a higher price in the sold token.  This is identical to a situation where the value of the shares of a Company rises due to its excellent performance. Therefore, in this case, investors hope to hold a coin that will be worth more than they actually paid for it in a short span of time.

Perfect examples of ICO’s were Bitcoin and Ethereum.  The Bitcoin project was based on the blockchain technology that was developed to create a decentralised currency.  On the other hand, the Ethereum project was created as a smart contracts platform.  In both cases, we have seen a stellar rise in the value of the currencies.  As such early investors enjoyed huge profits by investing in this particular crypto coins.

What is An Initial Coin Offering Regulation?

As explained earlier, ICO’s are so far not regulated by any financial bodies such as the Securities Exchange Commission (SEC) or Central Banks.  For this reason, they are considered to be disruptive capital raisers in the digital market.  It also means that potential investors should ensure that they are dealing with serious and legitimate ICO’s and not Ponzi Schemes or HYIP’s (High Yield Investment Plans) which crumble and fail.

There are divergent opinions and stands on an international level about ICO’s. China has taken the very socialist stand to abolishing ICO’s which were becoming very popular and probably disruptive to classic ways of raising capital.  In early September 2017, China completely banned Initial Coin Offerings and declared them illegal.

Realistically, the ban is considered to be temporary. Until such time that China will formulate the legal framework surrounding ICO’s they will remain non-legitimate.  Again, this does not mean that China is partial to Cryptocurrencies.

On the other hand, Switzerland has taken a completely different stand. The Valiant participants in the Swiss ICO Summit held last September feel that ICO’s are here to stay!




How to Find The Next Best Initial Coin Offering

Initial Coin Offering

ICO’s are regarded by many as scam schemes.  However, there are plenty of other investors who are constantly searching for the best opportunity in cryptocurrency investments.  Ever since the dot com boom, crypto and blockchain projects have become the new rage and many have sky-rocketed in value, making their supporters a very happy return.

At the time of writing the Market Cap for digital currencies is over 260 billion with Bitcoin accounting for 110 billion.  Despite the fact that some say that this is a bubble and the prices are only due to speculation, ICO’s are not showing any signs of abating.

If you are wondering what is an Initial Coin Offering and where best to look for them – you can probably start by searching on sites such as ICOalert.  Sites of this sort will handle information about developers, pre-sales and public sales.  Therefore a smart investor, can collect information and do proper market research prior to entering into a commitment.

ICO’s Success – Check on Unique Ideas – See How You Can Use Your Tokens/Coins

Bitcoin was revolutionary in how it created Blockchain technology.  Therefore repeating the same idea will not be very impressive. If you are searching for the right ICO to invest in, look properly into the underlying idea.

You may also want to be sure that the coin that you are buying into is scarce enough.  Check whether the white paper provides for the coins to be destroyed or burnt if they are not sold.  The price is always determined by supply and demand. Therefore the scarcer the coin the higher the price should rise.  Likewise, if the underlying project is sensible and does well, the value of the coin (or your shareholding) will rise.

Great ICO’s will get quoted on several exchanges.  This is important so that you can easily “dump” or exchange your tokens or coins to FIAT Currencies or more popular digital coins – when the time is right.

Finally, a smart ICO will give you several purposes and services for which to “use” your coin.  The more diffuse the use of the coin, the more attractive it becomes.

What is an Initial Coin Offering – The Bottom Line

The bottom line is assessing whether an ICO is legit or scam and whether it is worth investing your money into is how professional and serious the developers of the project really are.  This is a great pointer and it is the first thing that you should be looking out for when doing your due diligence.

Cryptocoins’ discussions on forums are rife.  Therefore it pays you to check what the community is saying about ICO’s.  Check out YouTube review, Reddit Forums and special forums dedicated specifically for these sites before making any commitment.

You may also want to consult with our recent article – What is Crowdfunding?

 

 

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