What is an Initial Coin Offering?
Notes from the video ‘Diffusion Academy| Grammar |What is an Initial Coin Offering?‘ :
What is an Initial Coin Offering, or an ICO?
An Initial Coin Offering is a way for blockchain companies to raise funds using cryptocurrency.
How does an ICO work?
First, a blockchain company would create a new cryptocurrency.
Then, investors can buy these tokens or coins with other cryptocurrencies that are accepted by the company.
To participate in an ICO:
You need to own the relevant cryptocurrency that the company accepts.
Next, you need a compatible wallet that the companies can send the tokens to.
Third, you need to check the deposit address and send cryptocurrencies to that address.
Most ICOs would also need personal details from their investors as part of their KYC or Know Your Customer process.
Most ICOs have 3 parts to their token sale:
The Private Sale which is usually reserved for institutional investors
The Presale which usually targets the larger investors and has a higher minimum contribution compared to the Crowdsale.
Lastly, the Crowdsale which is usually the main tokensale and is open to retail investors and has low or no minimum contribution.
An ICO achieves its goals once its soft cap is reached.
The soft cap is the minimal amount of funds needed by the company to move forward with their project.
Most ICOs would also have a hard cap, which is the maximum amount that it would accept for its crowd sale.
What’s the difference between an ICO and other fundraising methods?
Unlike other fundraising methods like an Initial Public Offering, or Venture Capital, the investors do not get any equity or own part of the company.
Instead, people invest in an ICO in the hope that the cryptocurrencies would appreciate in value, so they can make a profit, or they might be interested in the utility of these cryptocurrencies in a future product.
Investing in cryptocurrencies have become increasingly popular these days.
According to a report by Fabric Ventures and TokenData, $5.6 billion was raised in 2017.
And the ICO hype isn’t stopping just yet.
According to the statistics from Coinschedule, over $18 billion was raised from January to September 2018 with projects like EOS raising over $4 billion.
The current hype surrounding ICOs may sometimes blind investors to the risks involved in investing in an ICO.
Some of these risks include:
The price of the cryptocurrency could decrease rapidly in short periods of time. This is because the cryptocurrency space is still in its infancy stage and the price of a token fluctuates based on popularity rather than any real underlying value.
Furthermore, there is also the risk of getting scammed. There are many scammers around taking advantage of unseasoned contributors and lack of regulation in the space.
Some of the more common scams include:
Which is the practice by persons who claim that they are raising funds for a blockchain project but vanishes with investors’ money during or after an ICO. Some of the infamous examples include the Vietnamese cryptocurrency company Modern Tech and Bitconnect.
Another common scam is phishing attack
Which is the practice of creating a fake website nearly identical to an ICO’s site but with a slightly different URL to trick users to send their funds or enter their private key.
So, always do your own research and be extremely careful when you invest in an ICO.
Here are some things you can do when researching an ICO:
First, read the whitepaper and understand the project, the issue the company is trying to solve, and business benefits of the project.
Next, look at the team members behind the project and their previous experiences.
Some projects also have their code uploaded on GitHub and have a prototype. So, be sure to look at their code and test out their prototype.
And always check the company’s website and the team members’ LinkedIn profiles to see if there are any red flags.
In summary, while ICOs are a great way for companies to fund some of the most innovative projects without the need for venture funding, and for investors to generate profits,
it is important to note that investing in ICOs is extremely risky. Yes, this means that even with thorough research, you can lose money in an ICO, so, you should never invest what you are not willing to lose.