ICO or the Initial Coin offering (sometimes called the Initial Currency offering), is a type of crowdfunding using cryptocurrencies. In an ICO crowdfunding, a certain number of cryptocurrencies are sold in the form of “tokens” or “coins” to the investors in exchange for legal tender or other digital currencies like Bitcoin or Ethereum. If the ICO’s funding goals are met or at the event of the project launches, the tokens sold are promoted as the future functional units of the currencies. An ICO can be a source of capital for start-up companies and it allows startups to avoid regulatory compliances such as those involved with venture capitalists and stock exchanges.
ICOs are not free from scams and security law violations. As a result of this, only half of the ICOs offered, survive for barely four months and rest all fail. As per records, half of the ICOs that were sold in 2017, failed by February 2018. Amidst all the failures and falling prices of cryptocurrencies, ICOs have not lost their glories as such a record of $7 billion was raised through ICOs between January to June 2018.
How does ICO work?
ICO starts with a whitepaper detailing the goals of the new venture. Details like blockchain hosting, number of tokens available for sale, number of tokens to be kept by the owners, nature of the payments that will be accepted, duration of the campaign and determination of the final price are included in the whitepaper, and they should be peer-reviewed and accessed by the public before the sale actually begins. The ICOs are opened for public access at a time and continues for a few weeks until the required amount is raised. When the required amount is not raised after the sale, the ICO is declared unsuccessful and all the tokens or the coins are refunded.
If the team meets the required amount, the final selling price per token is determined and the funds are then released to themselves to complete the venture.
Pros and Cons of ICOs
- ICOs give the startup companies manifold opportunities to shine. It proves to be helpful for those companies who cannot do their IPOs (initial public offering) because of the unnecessary paperwork involved. By presenting a good quality ICO whitepaper, it is enough for the blockchain projects to take part in an ICO.
- ICO helps in creating a cordial rapport between the community and the project. Having a healthy relationship with the community makes it easier to raise money in an ICO.
- Blockchain crowdfunding can raise a hefty amount; it signals how effective the project is going to be and shows that the project has high demands in the market. These things do wonders for the companies in attracting the interest of the investors.
- There is very little paperwork involved in an ICO, though it has benefitted most of the startup projects, at the same time, it involved a lot of scams in the market. There are loads of fraudulent examples been recorded; henceforth, loads of scammers have entered the market to make a quick deal out of this. These scammers simply create a bogus whitepaper or even go to the extent to omit most of the important details about the ventures. They ornate the whitepaper in such a way that it seems to be a very important one.
- For the blockchain, an ICO is a very laborious event. As such, blockchains are not scalable enough to take up such a heavy-duty activity.
Purposes of Using ICOs
There are two primary purposes for using ICOs:
For creating coins which are different from Bitcoins and having their own specific features and blockchain.
For creating new projects for which a special currency is needed, for which the equity is raised via crowdfunding to involve everyone in the project.