Initial Coin Offering (ICO)

What is an Initial Coin Offering?

The same way we have the Initial Public Offering(IPO) in the stock market is the same way the crypto market has the Initial Coin Offering. An ICO is essentially an event where a cryptocurrency is sold by a company for generating funds. Investors interested in the project can exchange funds for respective amounts of the crypto token. 

These events can be profitable for investors a lot of the time but they also pose a high-risk investment. That’s why many reputable platforms encourage enthusiasts and holders to ‘do your own research’(DYOR). Let’s first understand how ICOs work in detail. 

Types of ICOs

There are two kinds of initial coin offerings and they are;

1. Public ICO

These are the kind of initial coin offerings that target the general public. It’s a kind of a free-market where anyone gets the opportunity to invest in a particular cryptocurrency. They are typically riskier than private ones since the barrier to entry is usually lenient. 

2. Private ICO

A private ICO is a kind of fund-raising event open to a select number of investors. Companies that organize private initial coin offerings can impose a minimum investment amount. Furthermore, they can restrict entry based on specified qualities for accreditation. 

Initial Coin Offering: How it Works

An official announcement is usually made when a company wants to organize an ICO. The news usually comes with relevant information like the date of the event, the rules, and the procedures for obtaining the coin. Although some ICOs can accept fiat money, most of them exchange their tokens for other popular cryptocurrencies like BTC and ETH.

To buy, investors are typically provided with a particular wallet address where funds are sent in exchange for tokens. As an investor, you will collect your purchased coins into your wallet address. A major benefit of the ICO is that they directly connect the investor to the company, thereby eliminating the need for intermediaries. 

How to Setup an Initial Coin Offering?

Telegram, the instant messaging service, had the largest ICO ever as it raised about $1.7 billion in a private event. A company typically will demonstrate a thorough understanding of the law, finance, and blockchain technology while conducting an ICO. The event’s motive is to capitalize off the decentralized blockchain network and raise funds while aligning the interests of investors and the company. 

Let’s go over the Steps for organizing an ICO;

1. Recognize the targets for the investment

Before a company can raise funds with an ICO, they need to identify its investment targets. That information further informs the fundraising project and helps to highlight the important aspects of the project to the prospective investor.

2. Develop the tokens

After recognizing the investment targets, the next step of the project should be creating the tokens/coins. These coins will serve as the unit representation of assets and utility in the network protocol. Specialized blockchain technologies are employed in creating these tokens. However, the tokens are not created from scratch hence making their creation process relatively simple. Although they’re only new versions of existing cryptocurrencies, the developed tokens should be tradeable and fungible.

3. Promote the project

Typically, the step that follows the development of tokens is to organize promotion campaigns. Platforms like Google and Facebook have banned the promotion of ICOs. Nonetheless, there are still several platforms like CoinMarketCap where companies can announce both ongoing and upcoming ICOs to potential investors. By the time this article was written (mid-October, 2022), the platform announced four ongoing ICOs and they are:

• Interest Protocol(IPT)
• WeSendit(WSI)
• re: water(WTR)
• Byepix(EPIX)

4. The Initial Offering

Depending on the pool of potential investors and the plans for a project, the offering can be designed in the form of batches. That way, the proceeds from the initial coin offering can be redirected into the release of a new product or service. The acquired tokens can be used to grant access to these services or products, or they can be held in anticipation of a profitable price increase.

What determines Success in Initial Coin Offerings?

All over the world, government bodies have regulations that ICOs must abide by to avoid being labeled fraud. Generally, they’re considered to be high-risk ventures so it’s the responsibility of an investor to carry out due research before purchasing tokens at an initial coin offering. This is because fraudulent ICOs exist on the market too and there’s no safety net for anyone who invests in them.

Before investing money into an ICO, you should understand the factors that determine the success of ICOs. The first has to do with the provable expertise of the team behind the crypto project. It’s a good sign if these team members are accessible on social media. Also, the quality of the project’s roadmap is a good tell as to whether it will go far or not. Potential investors need to review the whitepapers of these tokens before investing in them. 

People should also find out about the project’s security before investing in any project. A couple of signs that a project might be fraud are poorly built websites and the absence of third-party audits. Successfully sold ICO tokens are typically listed on crypto exchanges. 

Overall, potential ICO investors should only invest an amount of money that won’t have them lose sleep if it’s lost.

What Happens After the Initial Coin Offering?

After an ICO is successful, it will get listed on a prominent crypto exchange platform. Then post-ICO investors can join the project and buy the available tokens. The coins of a project can be highly demanded in the market after the ICO depending on the promotion and success of the event.