A Beginner’s Guide to Understanding Initial Coin Offering (ICO)

Are you wondering what heck ICO is? If so, you’re not the only one. Since the past few years, one of the most searched questions in the crypto space has been ‘what is an ICO?’ This is because every other day, there is a news headline about ICO fundraising.

The finance world has undergone some big changes in recent years. And one of the biggest and most notable changes is the introduction of Initial Coin Offerings (ICOs). Most probably, you already know some popular cryptocurrencies like Bitcoin and Ethereum. You may have also heard of the technology underlying these cryptocurrencies, that is, blockchain. If you want to understand the concept of ICOs, it’s crucial to have a basic knowledge of blockchain and smart contracts. So, in this post, we’ll try to explain what an ICO is and how it works.

What Is An ICO?

Initial Coin Offering (ICO) is quite similar to Initial Public Offering (IPO). As you know, IPO is a concept of the mainstream investment world. In the same way, an Initial Coin Offering (ICO) works in the cryptocurrency space. When a company releases their stock onto the stock market for the public, it is known as an Initial Public Offering. In an IPO, the interested people and companies can buy the shares of this company.

The ICO also works on the concept but here the offering is not equity, but cryptocurrency. When a cryptocurrency company seeks to create a new coin, app, or service, it launches an ICO. An investor can purchase the offering with fiat currency or digital coins. However, unlike IPOs, here the investor receives a new crypto coin instead of equity. The company gives a new cryptocurrency token specific to the ICO. Now, if in future that token performs fine and increase in value, the investor will reap a good return on investment.

Basically, ICO is a means of crowdfunding a cryptocurrency project. The investor’s funds are used by cryptocurrency companies for the project’s development costs, launching the product, and increasing usage and adoption of the coin. 

How Does It Work?

Initial coin offerings utilize blockchain technology which powers Bitcoin and other crypto coins. Most of the ICO’s on the market today are built on the Ethereumblockchain or similar technology. The project developer first creates an Ethereum smart contract and then invites investor. The interested people register on the platform and in return receive an Ethereum wallet address. The crypto tokens are transferred to this address.

The process of ICO extends over a period of a few days. It is divided into a pre-sale period and a public sale period. The ICO database is public and shared amongst hundreds of computers. However, unlike IPOs, ICO is unregulated and considered as a means of crowdfunding. It is due to this reason that startups are using ICOs to avoid the rigorous and regulated capital-raising process.

The basic difference between IPO and ICO is that ICOs are decentralized and largely unregulated. It is due to this reason that investors are advised to remain cautious of fraudulent ICO or crowd sale campaigns. There is no government organization like the U.S. Securities and Exchange Commission (SEC) to regular or oversee the activities of ICOs. As such, any loss suffered by investors in these fundraising may never be recovered.