What is an Initial Coin Offering (ICO)?

An initial coin offering (ICO) is a common way cryptocurrencies are created. They exploded in popularity during the bull run of 2017 and funded a number of excellent projects that we know today, such as Ethereum. This article will explain what an ICO is, how they work, and the benefits and risks of investing in an ICO.

What is an ICO?

An initial coin offering (ICO) begins when somebody has an idea for a coin or token. A coin or token can represent an asset, utility, or unit of value that goes onto a blockchain. Traditionally, all somebody needs to create an ICO is a white paper that outlines what the coin’s purpose is, and any other information to convince others that it will be a successful project.

This is when the general public can decide if they think the project has potential. If so, anyone can purchase these first utility tokens of the project. By purchasing these tokens they are funding the project at hand, and owning a piece of the project. All ICOs have a funding goal and once that is reached they can officially begin the project. People who purchase these tokens have hopes that the coin will be worth more in the future when the project actually begins. 

In principle, this is a great system to raise capital for promising projects, however, ICOs have gained a bad reputation due to a number of previous scams and technical issues in the past. 

ICO vs. IPO: how initial coin offerings typically work 

The term “initial coin offering” derives from the term “initial public offering” that is used in the traditional finance world. An initial public offering (IPO) is when a private corporation, such as a stock on the Australian Stock Exchange (ASX), offers individuals in the general public the opportunity to purchase shares. An IPO will take place after the corporation already has investors such as family, friends, or venture capitalists. The corporation must be in a strong and mature state to pass certain regulations before it goes public on a registered stock exchange.

An initial coin offering (ICO), on the other hand, refers to cryptocurrency tokens. Companies that launch ICOs are essentially trying to raise capital to get their project off the ground. To purchase an ICO, you typically send money or cryptocurrency to a blockchain project. Investors must do their own research and decide whether the project is legitimate and will be successful. If the project performs well then the ICO tokens they just purchased will be worth significantly more in the future. 

The ICO whitepaper

The whitepaper is a document that includes all relevant information about an ICO project and serves as the company’s business plan. This paper contains information about the project’s product structure. If these points are clearly stated and explained clearly, the ICO has a good chance of attracting participants. 

In order to consider investing, the reader will need to be impressed by the whitepaper. Generally, this means they are professionally written and include and illustrate anything relevant to the ICO project such as the problem it is aiming to solve, benefits of investing, team, roadmap, among other things. There is also usually further incentivisation to keep users interested in the long term.

What are the risks of investing in an ICO 

ICOs are typically speculative and risky investments. There is a chance that an ICO project could be either a scam, not set up correctly creating technical flaws, or that it could be hacked and funds stolen.

The crypto and blockchain industry is still in its early stages, which means that there are more risks than traditional financial markets that are more strictly regulated. When ICOs took off in 2017, many of them were known for being “pump and dump” scams. Scammers would produce compelling white papers, advertise they had working technology, and create flashy websites. They would then launch their ICO, raise money, but in the end, would withdraw the funds and disappear (in crypto this is often referred to as a “rug pull”).

ICOs in 2017 had a terrible reputation and people began to avoid them in fear that they would lose their investment. Since 2017 however, there have been more laws and regulations for ICOs even from national governments, varying from country to country. For example, China completely banned ICOs in 2017. The United States declared they could apply federal securities laws to ICOs in 2017 however, did not declare ICOs as a security token. In Australia, ICOs are legal, however, they are subject to Australian consumer law.

What are the benefits of investing in an ICO?

If you do your own research, such as reading the white paper carefully, and truly believe that the an ICO token will be useful, then you could be an early investor in something revolutionary, like Ethereum.

Another benefit to investing in an ICO is that you are funding projects that could potentially change the world for the better. Crowdfunding through an ICO can be very rewarding. These projects usually have community groups on Telegram or Facebook to allow you to talk with others involved, including developers. If the project is a success you can take pride in knowing that you were part of the reason for making that possible! 

Wrap up

An initial coin offering (ICO) is a popular way that cryptocurrencies are created. Investors who purchase ICO tokens are helping to fund a project, and they recieve ICO tokens in exchange, that act like shares in a company, but they also typically have a functional use in the project ecosystem as well. If you would like to learn more about Ethereum, how to build a diverse portfolio, or anything else crypto and blockchain related, keep exploring Swyftx Learn!