Meaning of Initial Coin Offering (ICO) and How It Works

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Meaning of Initial Coin Offering (ICO) and How It Works

One of the most popular terms in the blockchain industry is Initial Coin Offering (ICO), which is analogous to the conventional business Initial Public Offering (IPO). The major difference is that the latter is more dependent on venture capitalists for it to kick-off while in the case of ICO, anybody can sponsor ― the only requirement is for them to own a cryptocurrency (Bitcoin, Ethereum, Monero, etc, depending on your choice of payment).

What is ICO?

An Initial Coin Offering (ICO) is an innovative and unique form of blockchain-based financing mechanism, which involves the issuance of a start-up stake (token) on a blockchain in exchange for investors cryptocurrencies. The component of the transaction is handled by blockchain protocols known as smart contracts. A smart contract is automated to execute a transaction based on the set criteria agreed by any two parties involved in a transaction. 

ICO is another business disruption made possible by blockchain. It has been the major means of funding for blockchain-related startups since 2017 when it started attracting billions of dollars investments without any intervention of financial services personnel. 

According to CoinDesk, in 2017, ICO funding totalled about $5.4 billion dollars and during the first two months of 2018 alone, ICO attracted more than $4 billion, a surprising increase. Up until then, ICO funding is usually below $20 million per month.

What is Token/Cryptocoin?

Token or crypto coin are the digital coins offered during an ICO and it is equivalent to shares offered in conventional business IPOs. When the smart contract executes, it allocates a token to an investor in relation to the worth of the cryptocurrency transferred. 

Importance/Benefits of ICO

Some of the advantages of ICO for startup entrepreneurs include;

Easy Finance of new Projects

Most internet projects are open-source, which means their products can be freely used by anybody even without paying them a dime. Thanks to ICO, any blockchain related company (open-source included) can now source to kick-off a new project without the need of moving around potential investors office to pitch their business plan.

It helps to build customer base

Users are the measurement of the success of any digital platform. When a company issues an ICO, most of the time, the new investors are given free access to the platform.

This is another plus for a start as these investors will contribute to their number of users. Although IPO investors can also contribute and check on the company they invested in, their population makes the difference.

In an IPO, a company can have two venture capitalists checking out the product while in ICO, there can be as much as a thousand. 

It gets everyone involved

Conventional business investments such as IPO are retained for certain group of people with different name tags ranging from venture capitalists, Angel investors to mutual funds. With ICO, anybody, either you are not as rich as most of the venture capitalists, provided you have a cryptocurrency; satisfy with the ICO clause, you are good to go. 

Allow access to funds worldwide

ICOs allows access to potential investors around the globe. The blockchain is a unified platform where citizens of all countries can voluntarily trade provided the nation’s law is not against it.

No taxation

Raised funds during ICO is not subject to taxation. The issue of taxation may occur when developers are trying to exchange received investment funds for fiat currency to start the financing of the project.

If they are lucky to find a platform that has all they need and they could pay using the digital coin, the probability of being taxed is minimal.

Risks of ICOs

The following are to be considered by investors before exchanging their cryptocurrency for a token in a company;

No Guiding Rules and Regulations

Just like the cryptocurrency platform which has no authority body controlling it, the ICOs too is not regulated by any financial body to ensure a thorough regulation.

There have been reported ICOs scam such as the case of Pincoin and iFan which allegedly scammed about 32,000 people of $660 million.

Many government bodies are now stepping in to reduce the rate of frauds committed through ICOs. But there is a concern if authority bodies stepped into this platform, would it still remain anonymous?

Failure to Deliver

With the ease at which fund is raised, founders may become complacent leading to their inability to deliver as promised.

And since there is no way to hold them responsible for such, they are able to walk away freely without any security agency on their trail.

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To avoid any of the two risks of investing in ICOs as listed above, ensure you read through the business model, if it looks like a scam, then avoid it, do not be tempted by gratifying return.

Blockchain investments should be treated like any business and not a Ponzi scheme. 

How to launch an ICO

If you are considering a blockchain-related technology which you believe will revolutionize the digital space and will like to raise funds through Blockchains using ICOs, read through the following guides;

Idea creation

Just as any business starts with an idea, to start an ICO launch, get your idea on paper. Share it with others to get more insight.

You may even conduct market research to examine its success potentiality.

Getting a team

When you have a well-developed idea, assemble a team to help you with the dream ― depending on what you will need.

Ensure they believe in the project to avoid future trouble for everyone. This can determine whether the project will succeed or fail.

Get to the Planning Table

You and your team should discuss how things will work out. Best ways to raise funds and how much you will need for the successful execution of the project.

Consult Experts

To avoid future catastrophes, it is advisable to discuss your plan with an expert or a present CEO in a related company to get an insight on how things should look like.

Create a Business Plan

Get all your ideas and discoveries on paper. Estimate what the future looks like and how you are planning to handle it.

Get a Lawyer

For proper valuation and registration of your company, you may need a legal adviser.

Aside from that, a legal adviser could tell you if you are violating any law including Anti-Money Laundering (AML) or Know Your Customer (KYC) policy.

Promoting Your Token Sale

Now that all is set, you may proceed to launch your ICO on the blockchain platform of your choice. Marketing the release of the token is allowed too.

Showcase the Product

Since you are not a scam, you should be able to showcase the prototype of your product ― better before the ICOs announcement or immediately after. This will boost investors interest in your product.

Conclusion

Although there have been lots of reported ICOs scams, there are also many successful ICOs that has generated great ROIs for investors such as Ethereum ICO in 2014 which raised $18 million within 42 days. As at the time of launching, the token was priced at $0.43 but as at 16th of January, 2018, it was worth $1,019.89 ― more than 237,083%.

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3 thoughts on “Meaning of Initial Coin Offering (ICO) and How It Works

  1. Wow! This is an interesting write-up. Please, how do you think someone can do this in Nigeria. Are there block chain programmers in the country at all?

    I have an idea that will be based on blockchain.

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