Written by Shivashish Yadav on   -  8 min read

What is Initial Coin Offering (ICO), and how does it work?

Dummy/Noob guide for everyone

What is Initial Coin Offering (ICO) and how does it work?

Have you recently heard about what is ICO (Initial Coin Offering). Why, whoever you see today wants to know about this Term ICO. Friends, as we know that nowadays Cryptocurrency is trending a lot on the Internet.

The best example of Cryptocurrency we all know can be called Bitcoin. Because of the rapid increase in the price of Bitcoin, people have shown more interest in this regard. In such a situation, gradually people are getting more inclined towards all Cryptocurrency and everything related to it.

Nowadays, a new thing is being seen on the internet on any website related to Bitcoin or cryptocurrency, which is called Initial Coin Offering (ICO). Nowadays, ICOs have become a topic of great discussion on the Internet. But people are not getting correct information about ICO.

That's why today I thought why not you should be given complete information about what is ICO and what are its benefits, so that it will be easy for you to understand it. So after all, what is ICO and why everyone is talking so much about it.

What is ICO ?

ICO is used as an alternative to crowdfunding to issue a new cryptocurrency. Whenever money is raised through crowdfunding for any cryptocurrency, in that process, the company provides a token to its investors who have helped the company to raise money, instead of a share or share in the company. This token can be used by the investor as he wishes.

The investor can sell this token issued by the company to anyone. Or you can keep it with you and wait for its price to increase. You can use this token to buy bitcoins using bitcoin, Ethereum or any other cryptocurrency. These tokens can be used everywhere.

History Of ICO initial coin offering

The first token sale held by Mastercoin in July 2013, Ethereum raised 3,700 BTC in its first 12 hours, equivalent to approximately $2.3 million, with the token sale in 2014.

ICOs and token sales have become extremely popular these days. ICOs have attracted the attention of many people due to the profits made in it.

Why are ICOs used?

Whenever a company starts, it first has to raise money for its product. He has three main ways to raise money-

  1. First, he should give shares in his company to the investors.
  2. Secondly, he should fund his company by taking interest (loan) from any bank. In this case, the company will also have to pay interest to the bank.
  3. The third and last way is to make and sell the product by taking order before making the product and depositing money from it.

ICO is one of the best and easiest way for an individual or company to raise funds for their projects, and at the same time not only companies but also people invest in his project.

Whenever a company has to raise money for its project / start-up, then for that they use ICO i.e. Initial Coin Offering. Simply put, the process of raising funds for the company's product through crowdfunding is done through ICO.

According to a report, in November 2017, around 50 offers are happening every month. Which is a very big number.

How does ICO work?

Whenever a cryptocurrency startup firm wants to raise funds through ICO, then that company makes a plan before raising the fund. The company writes all the information related to the project on white paper. In which it is told that how much money will be taken in the project and how much money does the firm need?

How long will it take for the firm to raise the fund? How long will this ICO campaign last and what happens if the amount raised is less than the planned amount. All this information is written on that white paper. White paper is a very important paper of ICO.

Investors are more interested in buying Cryptocurrency at lower rates during ICO as equity is not involved in most of the ICO cases. Initially ICO is available at low rates but as the company grows its price value and market value also increases.

Investors invest on ICO with the idea of ​​buying at low prices and selling them for more money. When the ICO comes on the exchanges, the investor makes a lot of profit. Bitcoin has just crossed $1000 in recent times. Whereas in 2011 it was only one dollar.

Types of ICO

ICOs can be divided into different types. Project funding in an ICO can either have a time limit, a target, which cannot be changed. Or else in ICO each token is given a pre-determined price which never changes during the ICO period.

In this case, the token supply is kept perpetual. This includes a dynamic funding goal. In this case, token distribution is done according to the funding received. If your project receives more funding, the value of the token increases. This helps the company to raise more funds.

Advantages and Disadvantages of ICO

There are many benefits of ICO. As with every good thing, there is always a bad thing associated with it, in the same way there are some disadvantages of ICO along with its advantages. Let us know the advantages and disadvantages of ICO.

Advantages of ICO:

  • The main and best advantage of ICO is that through this the companies who are looking for investors, they get people to invest. The same benefit is also for those who invest in it. Investors can invest in ICO very easily. ICO is open to all for investment. Anyone can invest in it.
  • Tokens can be bought at low prices whenever the project starts. After the success of the project, their value increases significantly. And then you can earn a lot of money by selling them.
  • The liquidity in ICO tokens is the reason why it is so popular. The liquidity in the token and transparency in financial things make it better than traditional investment schemes.

Disadvantages of ICO

ICO not only has advantages, but it also has some disadvantages.

  • The liquidity offered in the token is its own, but before investing in it, you should have complete knowledge about the project, and if you invest without complete information than you may have to bear a lot of loss. Because if the project is not successful, then you have to decide what will happen to your money. So first get complete information.
  • Because of its popularity, nowadays, many companies are also committing fraud in the name of ICO. They run away with the money invested. Therefore, before investing, gather complete information about the company and invest money only when you feel everything is right.
  • Token volatility is also a hotly debated topic in ICOs. If a token is doing well today, then do you know if its price will come down later? This can happen. Many things can cause this to happen. Therefore, the volatility of the token cannot be side-stepped while investing.

Difference between ICO and IPO

Many people also compare an ICO with an IPO (Initial Public Offering), but let me tell you that there is a big difference between the two. Unlike IPO, ICO does not give you any share or ownership in the company.

In IPO where the investor is given the right to vote in the internal affairs of the company. There is nothing like this in an ICO. In ICO, the investor has the right to use only the token he has.

Only established companies that have been in operation for some time only issue IPOs while an ICO can be used to raise capital for a new start-up. Most companies that issue ICOs do not have a ready-made product in the market. Most of them have only one white paper which describes the information related to the product.

IPO is done after the inception of the company. Whereas ICO is done to raise money for the company or that product before the product comes into the market. ICO is issued in the early stage of the company, then IPO is issued after the establishment of the company.

Future of ICO

Looking at the way ICO has gained so much popularity in such a short time, it seems that this trick of investing and raising funds is going to stay in the market for a long time. The increasing trust and increased offerings of the people towards this are seen pointing to this more. It is too early to say anything about the ICO right now, but as per the current trend, it is a long-term plan.