What is an ICO

What Is An Initial Coin Offering (ICO) & How Does It Work?

Britanny Burr Blog

If you’re familiar with the crypto or blockchain space, you may have heard the term ICO or Initial Coin Offering. If you’re wondering, “what is an ICO?” you’re absolutely not alone. It’s a term that’s really specific to the digital currency space. While it may sound a bit confusing, it’s actually quite similar to some other practices in the non-digital world. We’ve put together an ICO guide so you don’t have to stay in the dark for one second longer. Here’s everything you need to know. 

So, What is an ICO?

Kicking off with the most burning of questions, what on earth is an ICO? Well, ICO stands for initial coin offering or initial currency offering. An initial coin offering is a method of fundraising for early-stage projects that involve cryptocurrency and/or blockchain technology. It’s a completely-digital version of crowdfunding, almost like a Kickstarter campaign.

To kick-off an ICO, a startup would make a fixed amount of its own digital token and sell them to early investors in exchange for other cryptocurrencies like Bitcoin, for example. The company’s new cryptocurrency that investors are purchasing may have some value in relation to the company’s offering or it may just represent an investment in the company itself. By launching an ICO, a company can raise seed money without having to give up actual shares of the business. In addition, they gain a community of investors who are now incentivized to help them succeed. 

ICOs help fund projects that wouldn’t otherwise be able to move forward or lunch. This type of fundraising also removes any third party between the company and the investor, directly connecting the two. Now that we’ve painted a general picture of ICOs, let’s dive into how they work.

How Do ICOs Work?

Prior to launching an ICO, the company behind the campaign normally begins with a white paper. The white paper serves the purpose of educating investors on everything they need to know about the project. The white paper covers information about the company, the team behind the project, the scope of the project and its objectives, the fundraising goal of the ICO, what type of payments will be accepted, how long the campaign will run, the number of tokens investors will receive, etc. A white paper, in this case, is basically an in-depth pitch to inform and entice potential investors. 

The company also has to decide on the structure of its ICO. For example, they can have static support and static price, meaning that there is a fixed amount of tokens available and they are for sale at a preset price. Alternatively, the ICO can have a static supply and a dynamic price or a dynamic supply and static price. While this sounds like a word salad, it’s all just to say that the ICO needs to have clear parameters so the company and all of the potential investors understand how it will work in the clearest possible terms. 

Once the ICO structure is determined and the white paper is pushed out to the public, the campaign is heavily promoted. ICOs can be carried out in several rounds or in one big burst, that is up to the company itself. If an ICO doesn’t reach its goal and cannot move ahead, investors are reimbursed. 

To sum it all up, a company decides on their fundraising goal and strategy, communicates its goals to the public via its white paper, and promotes the ICO to potential investors. See? It’s not so complicated!

Types of ICOs

One ICO can look wildly different from the next. That said, they all fall under two broad categories: private and public ICOs. Private initial coin offerings allow only a limited number of investors, usually only accredited investors, to participate. In these cases, there is often a minimum investment requirement, too, therefore really cutting down the pool of potential investors. 

Public ICOs target the general public. Therefore, anyone who is interested and is marginally aware of how to buy cryptocurrency can become an investor. ICOs aren’t regulated, so private models are becoming increasingly popular for the sake of security and some semblance of regulation. 

Beyond that, a startup can choose to offer utility tokens or security tokens for their ICO. If they choose utility tokens, this means that they will have a direct use or function within the business’ future product or service. They’re not an investment in the company, necessarily, but they will give the buyer access to the company’s offerings, they’re basically digital coupons for use once the project is complete. 

Security tokens, on the other hand, don’t have actual utility in relation to the company. Instead, they represent the investment itself. The value is in the external, tradeable asset. 

If you’re starting to get a feel for what ICOs are, they may be reminding you of IPOs if you’re someone who’s familiar with the stock market. 

ICO Vs IPO

An ICO, initial coin offering and an IPO, initial public offering, are similar in the way that they are both vehicles for raising capital. IPOs take place when companies offer stock during the process of going public. This distributes shares to investors. The main difference between the two is that IPOs grant an investor an ownership stake in a company and ICOs don’t. ICO investors are investing in the possibility that a project will succeed and the token they’ve purchased will become valuable. 

Another difference is that IPOs are very highly regulated and ICOs aren’t really regulated at all. ICOs look really different from one to the next, but most IPOs are really similar in nature on account of the regulations they work within. 

While there are many differences between the two, they are both fundraising strategies in order to raise capital for a company is where they overlap. 

Now, let’s talk about the advantages and disadvantages of ICOs.

ICO Pros and Cons

If you’re new to ICOs, you may be wondering about some of the benefits and drawbacks. Let’s kick off with the benefits. ICOs are incredibly accessible, so anyone can invest. They’re also very accessible for the companies behind them as you can use online services to generate new crypto tokens. Therefore, you don’t need to actually code the new token yourself if that’s not something that’s in your wheelhouse. So, the accessibility of ICOs is certainly attractive to companies and investors alike.

There’s also the possibility of a big return if a project is to blow up after you’ve invested. Moreover, if you’ve bought utility tokens, you can enjoy the new service as soon as it’s ready and be on the ground floor of something new and exciting. ICOs are also a great opportunity to invest in companies, projects, or initiatives that you believe in. Another benefit is the fact that there are no middlemen involved. 

Now, let’s talk cons. Because ICOs are not regulated, there is a high rate of scams and fraudulent activities in relation to ICO. This is especially damaging because lost funds cannot be recovered, even in the face of fraud, because there are no governing or regulatory bodies to enforce the recovery. Beyond the risk of fraud, there is also the risk of failure. If an ICO fails, the tokens will essentially become worthless to the investors. So, most ICO investors do have pretty high risk tolerance. That said, proper research can circumvent a lot of the risk potential, at least in regards to scams and malicious behaviour. 

What is a Reverse ICO?

While we’re talking about ICOs, we might as well discuss reverse ICOs or rICOs. A reverse ICO is almost like an overlap between IPOs and ICOs. A reverse ICO is when an already established business that isn’t necessarily blockchain or crypto-related issues a token to decentralize and get into the crypto space. Essentially, a company just launches crypto tokens and goes to the public for crowdfunding. The only difference between an ICO and a reverse ICO is that ICOs are new companies that are raising funds for the first time. Reverse ICOs are established companies looking to raise money through crypto token sales. These were really popular during the crypto bubble in 2017 and 2018 but less so now. 

What is an IDO?

Since we’re chatting about all types of initial offerings, we might as well dive a little deeper in case you encounter these other terms. An IDO is an initial DEX offering. IDOs are tokens that represent an asset hosted on a decentralized exchange (DEX). This is different from an ICO because ICOs sell tokens before they are listed on an exchange and IDOs list them immediately. 

IDOs have emerged as a new form of fundraising model, similar to an ICO. ICOs necessitate a waiting period until investors can claim their tokens. Though, IDOs allow investors to immediately access and trade their tokens if they want. The decentralized nature of IDOs allows for autonomy on all sides of the transaction. 

What is an IEO?

Now, what’s an IEO? An IEO is an initial exchange offering. These are basically the crypto equivalent to an IPO. IEOs are launched on a crypto exchange platform, rather than a company’s website like an ICO. Basically, a crypto exchange is overseeing the sale of the tokens on behalf of the project owners. IEOs are often regarded as more secure than ICOs because of this extra layer of security and regulation. 

If you want to learn more about ICOs or any other topic in the crypto, blockchain, and emerging tech space, please let us know! We’re here for you, all you need to do is ask.