Introduction to Initial Coin Offering (ICOs)
An Initial Coin Offering is a means adopted by new blockchain companies to raise funds for their product development, marketing activities, research & development, infrastructure growth, and other business prospects. The companies issue their own tokens to their investors in return of Bitcoin or Ethereum. These tokens can be used as an investment in a new product, sharing the dividend to the stakeholders, and buying valuable assets. It is commonly known as ICO and shares the same purpose as that of Initial Public Offering (IPO) but the process involved in both the means is entirely different.
It takes years of hard work, sufficient resources, products with a proven track record, and goodwill for a company to get the ball rolling for an IPO whereas ICO can be initiated at the beginning level. The companies have to follow all the IPO documentation work as instructed by the government agencies. An IPO is regulated by the central authorities and the companies face severe penalties if any fraudulent activities are traced like corporate misconduct, pump & dump of penny stocks at large quantities, spreading false news, Ponzi schemes, and other offenses. ICO has a decentralized structure with no international borders and there’s no specific authority to scrutinize its functionalities. Unlike the shareholders, the token holders do not possess any equity and the blockchain companies are under no obligation to fulfill the commitments.
How are funds raised through ICO?
The first step that any blockchain company takes to raise funds through ICO is to make a whitepaper. It will have all the details about the project like the valuation, funds required, the token amount reserved by the founders, and the duration of the ICO campaign. After that, the whitepaper is circulated in the business community to attract potential investors. The ones who are convinced with the business idea buy the tokens either through bitcoin or any other cryptocurrency of their choice. The tokens are issued via a smart contract. It’s an agreement between the investors and blockchain company where the terms & conditions will be mentioned.
The first-ever ICO was raised by Mastercoin in the year 2013. The very next year, Ethereum joined the league and raised US$ 18 Million by the end of its ICO campaign. Ether’s debut price was US$0. 30 and now it’s the price is US$146. 03, as on April 3, 2020. It also ranks among the top 5 successful ICOs with the biggest return on investment. Since then, every blockchain company has embraced the concept of ICO and uses it as a prime source of capital investment. This trend has seen a humongous rise in the past few years. According to the reports, the funding raised in the year 2017 was a whopping US$ 10 Billion. And, every year it is growing by 10-15%.
Advantages of ICO
- The hopeful projects having the potential to receive a chance to shine with the help of ICOs. Ethereum is the principal example of this fact and it could be noticed with its achievements in the last few years. It has also served as an ideal platform on the top of which the other projects could develop.
- Centralized world has several projects that are not able to perform their IPOs because of the unwanted paperwork involved in the process. This is not the case with ICO since blockchain projects can become its part simply by presenting an ICO whitepaper of good quality.
- ICO whitepaper is the documentation piece written concisely presenting problems aimed at the project and method that will be followed for solving these problems. By having a look at this whitepaper, the decision could be made by potential investors as to whether they want to invest in the project or not.
- Another remarkable benefit of ICO is that it is having the ability to establish rapport among community and project. Any creator of ICO is very well familiar with the criticalities that they need to face for healthy community development.
- It is a fact that within the span of 4.5 months, $6.8 billion were collected by the blockchain crowdfunding. It clearly shows the demand as well as the hype that exists in these projects that can actually do wonders.
- Developers are also able to get enormous incentives with the help of ICO funding that helps them to take the extra step and emerge with projects that are more innovative and exciting.
- With the help of ICO, investors get the opportunity to discover and invest in the thing that is big, Ethereum being the perfect example of this.