Cryptocurrency & ICO News
Cryptocurrency Secrets News Blog – ICO New Feed
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An initial coin offering (ICO) is the cryptocurrency industry’s equivalent to an initial public offering (IPO). A company looking to raise money to create a new coin, app, or service launches an ICO as a way to raise funds.
Interested investors can buy into the offering and receive a new cryptocurrency token issued by the company. This token may have some utility in using the product or service the company is offering, or it may just represent a stake in the company or project.
How an Initial Coin Offering (ICO) Works
When a cryptocurrency startup wants to raise money through ICO, it usually creates a whitepaper which outlines what the project is about, the need the project will fulfill upon completion, how much money is needed, how many of the virtual tokens the founders will keep, what type of money will be accepted, and how long the ICO campaign will run for.
During the ICO campaign, enthusiasts and supporters of the project buy some of the project’s tokens with fiat or digital currency. These coins are referred to the buyers as tokens and are similar to shares of a company sold to investors during an IPO.
If the money raised does not meet the minimum funds required by the firm, the money may be returned to the backers; at this point, the ICO would be deemed unsuccessful. If the funding requirements are met within the specified timeframe, the money raised is used to pursue the goals of the project.
Although ICOs aren’t regulated, the Securities and Exchange Commission (SEC) can intervene. For example, the maker of Telegram raised $1.7 billion in an ICO in 2018 and 2019, but the SEC filed an emergency action and obtained a temporary restraining order due to alleged illegal activity on the part of the development team.1 In March 2020, the U.S. District Court for the Southern District of New York issued a preliminary injunction, and Telegram had to return $1.2 billion to investors and pay a civil penalty of $18.5 million.
Investors looking to buy into ICOs should first familiarize themselves with the cryptocurrency space more broadly. In the case of most ICOs, investors must purchase tokens with pre-existing cryptocurrencies. This means that an ICO investor will need to already have a cryptocurrency wallet set up for a currency like bitcoin or ethereum, as well as having a wallet capable of holding whichever token or currency they want to purchase.
How does one go about finding ICOs in which to participate? There is no recipe for staying abreast of the latest ICOs. The best thing that an interested investor can do is read up about new projects online. ICOs generate a substantial amount of hype, and there are numerous places online in which investors gather to discuss new opportunities. There are dedicated sites that aggregate ICOs, allowing investors to discover new ICOs and compare different offerings against one another.
Initial Coin Offering (ICO) vs. Initial Public Offering (IPO)
For traditional companies, there are a few ways of going about raising the funds necessary for development and expansion. A company can start small and grow as its profits allow, remaining beholden only to company owners. However, this also means they may have to wait a long time for funds to build up. Alternately, companies can look to outside investors for early support, providing them a quick influx of cash—but typically coming with the trade-off of giving away a portion of ownership stake. Another method is to go public, earning funds from individual investors by selling shares through an IPO.
While IPOs deal purely with investors, ICOs may deal with supporters that are keen to invest in a new project, much like a crowdfunding event. But ICOs differ from crowdfunding in that the backers of ICOs are motivated by a prospective return on their investments while the funds raised in crowdfunding campaigns are basically donations. For these reasons, ICOs are referred to as “crowdsales.”
ICOs also retain at least two important structural differences from IPOs. First, ICOs are largely unregulated, meaning that government organizations like the Securities and Exchange Commission (SEC) do not oversee them.3 Secondly, due to their decentralization and lack of regulation, ICOs are much freer in terms of structure than IPOs.
ICOs can be structured in a variety of ways. In some cases, a company sets a specific goal or limit for its funding, which means that each token sold in the ICO has a pre-set price and that the total token supply is static. In other cases, there is a static supply of ICO tokens but a dynamic funding goal—this means that the distribution of tokens to investors will be dependent upon the funds received (i.e. the more total funds received in the ICO, the higher the overall token price).
Still, others have a dynamic token supply which is determined according to the amount of funding received. In these cases, the price of a token is static, but there is no limit to the number of total tokens (save for parameters like ICO length).