An ICO, or Initial Coin Offering, is a way for startups to raise money by minting and issuing a new type of digital money. Normally, early investors become part owners of a startup. With an ICO, investors receive this new currency, which could eventually appreciate in value if the project succeeds - or could also turn out to be worthless, in case the project fails.

An ICO is one of the main types of funding using cryptocurrencies. It is often a form of crowdfunding, although a private ICO, which does not seek public investment, is also possible.

What Is an ICO?

ICO stands for “Initial Coin Offering,” and refers to a formerly popular method of fundraising capital for early-stage cryptocurrency projects. In an ICO, a blockchain-based startup mints a certain quantity of its own native digital token and offers them to early investors, normally in exchange for other cryptocurrencies such as bitcoin or ether.
As a type of digital crowdfunding, ICOs enable startups not only to raise funds without giving up equity but also to establish a community of incentivized users who want the project to succeed so their presale tokens rise in value.

How Does an ICO Work?

During an ICO campaign, crypto “tokens” are offered by the startup behind the ICO to investors in exchange for other cryptocurrency, such as Bitcoin or Ethereum. The token, or “coin”, is issued on the blockchain, a secure distributed ledger. These tokens only become currency if the funding goal of the ICO is met.

What happens during an ICO campaign:

Tokens are sold during an initial offering. Supporters buy these cryptocoins, usually with virtual currency: if the money raised meets the minimum amount needed within the set time frame, the startup can proceed with its plan; if the money raised does not meet the minimum amount set, funds are typically returned to investors.

Before selling their tokens, a startup generally issues a whitepaper, which tells prospective investors about the company and how the ICO will work.

An ICO white paper typically includes details on:

• The amount of money the startup plans to raise
• How funds will be used
• The startup’s business plans
• What type of currency can be used to buy tokens
• Tokenomics & Token Distribution, Allocation
• The timeline of the ICO
• Backgrounds of the founders and other team members

Just like a kickstarter crowdfunding campaign, supporters of an ICO have the option of helping a company meet its funding goals. Unlike a Kickstarter campaign, however, backers of an ICO are keen on getting a financial return on their investment.

Here are some of the ways ICO investors may be hoping to earn a return:

• The new cryptocurrency could take off over the long term, earning investors Bitcoin-sized riches.
• Early ICO investors may receive a discount compared with later investors.
• Some investors may buy in early and hope to sell their position quickly when the price is higher.
• The currency could have some kind of redeemable value with the issuing startup. For example, a gaming startup might create a currency that can be used for purchases on its gaming system.

Also, ICOs offer many benefits for startups, including:

• Cheaper fundraising: because ICOs are often practically unregulated, companies have to jump through fewer hoops and can pay less in legal and related costs than with traditional types of fundraising.
• No ownership dilution: When a company holds an IPO or sells an ownership stake to a venture-capital firm, existing owners see their positions get reduced, or “diluted.” With an ICO, existing owners hold onto what they have.
• More control: When a VC firm invests in a startup, the firm typically gains a say in the company’s business, such as by selecting a director for the company’s board. With an ICO, a company’s founders can keep more control over their business.

Are ICOs Legitimate?

Some investors have been ripped off by ICO scams. An ICO may be advertised online but then disappear after raising money for a few days. At the same time, there have been success stories of legitimate companies that are building promising products and have used ICOs for funding.

Some ICOs fall between these extremes. Some companies may turn to an ICO because they can’t convince VC firms or other traditional sources of funding to make an investment. Those companies might not be complete scams, but they also might not be 100% grown-up companies with real business plans.

ICOs are controversial. Believers say they can offer a more efficient way for startups to raise money. Skeptics say that the ICO market is a fraud-ridden bubble. What both sides can agree on is that investing in an ICO is a high-risk gamble. As with any extreme-risk investment, ICO investors could stand to make huge profits or could lose everything.

History of ICOs

Fundraising in the cryptocurrency industry took off in 2017 with the so-called ‘ICO mania’. With ICOs, many projects went live, while others failed miserably, both due to mismanagement of funds and lack of use cases, the latter also aggravated by fierce competition. The rest of the ICOs turned out to be pure scams (some say 80% of the total), and in many cases, the developers of a given project literally disappeared after raising large sums of capital from users.
Due to the worrying situation that was developed around the world of ICOs, there has been the creation of a new form of crypto funding, precisely to prevent other users from running into scams. ICOs were catching the attention of global financial regulators. Therefore, new methods of funding emerged, such as registering your project as a security with their jurisdiction’s financial regulator, or getting help from a large crypto operator to list the project, thus making it available for buying and selling to users of the listing platform, which is usually a crypto exchange.

Ethereum is considered to be the most successful ICO ever. It took place in 2014 and it was officially announced by its founder Vitalik Buterin in early 2014 at a North American Bitcoin Conference in Miami. Buyers received ether (ETH) in exchange for bitcoin, and more than 7 million ether was sold in the first 12 hours of the sale. By the end of the sale, more than 50 million ether had been sold, amounting to about $17.3 million. This ICO gave birth to a blockchain that is still widely used by crypto users around the world, whose currency (ETH) sits in second place by market capitalization, right after Bitcoin. Since then, the majority of ICOs have occurred on the Ethereum network, and most have involved ERC-20 tokens.

Conclusion

An ICO is one effective method of raising venture capital and project funding, making it possible for businesses and projects to get financial support during their early stages.

The Project announces the initial coin offering list and other details related to the buying process. Interested investors invest in the project in exchange for crypto financial assets or tokens. Investors must open a special account on the blockchain platform to buy the tokens. After that, they can transfer the tokens to any account on the blockchain platform.

As an early investor of any ICO, they offer high potential profits, if you can determine which cryptocurrency is a good investment. Since you’re buying early, prices are often lower, and some ICOs offer tokens at discounted rates.
If you think you are able to make a killing on a promising new ICO, just make sure to do your own research beforehand. Cryptocurrency is all about high risk and high return, and ICOs are no different.