An Initial Coin Offering (ICO) is a type of funding that usually involves cryptocurrency. An ICO can be used as a source of capital for start-up companies or projects, particularly projects involved in cryptocurrencies, blockchain technology, decentralized finance, and digital assets. A typical ICO involves the issuance of tokens or coins in exchange for fiat currency. Contrary to popular belief, the investor in an initial coin offering does not receive an ownership stake in the company or start-up business. Instead, investors simply receive tokens or coins based on the amount of their fiat investment. The main purpose of an ICO is to raise start-up capital. The owner is exchanging tokens for fiat, using the fiat to launch the new business or project.
If a cryptocurrency start-up company wants to participate in an ICO, the first step is to create a white paper. It is a document designed to fully describe the project. Typically, a start-up company is launched with the primary purpose of solving a problem or improving upon an existing business. The white paper aims to provide potential investors with a detailed analysis of the project.
The white paper should answer the following questions:
- What is the purpose of the project?
- What is the problem this project can solve?
- When is the estimated launch date of the project?
- How much money is needed?
- What type of funds will be accepted as payment?
- How many tokens will be issued?
The white paper is very important because it provides investors with detailed information concerning the ICO. Still, investors should be aware that the white paper is not a legal document and it has not been approved by any type of regulatory agency.
ICO VS IPO
The main difference between an initial coin offering (ICO) and an initial public offering (IPO) is regulation. ICOs are largely unregulated, depending on the country of origin. However, during the past two years, ICO regulation has increased substantially, particularly in the United States. Concerning IPOs, regulation has always been required regardless of the country. For example, in the United Kingdom, IPOs are regulated by the Financial Conduct Authority (FCA). The IPO regulator in the United States is the Securities and Exchange Commission (SEC). The IPO process is very expensive and time-consuming. Consequently, a small company can’t participate in an IPO.
Another important distinction between ICO and IPO is ownership of the company. When an investor participates in an ICO, they receive tokens issued by the start-up company. However, the tokens do not represent ownership in the company. Regarding an IPO, the investor receives shares in the company which represents ownership. The investor owns a percentage of the company based on the number of purchased shares.
ICOs and IPOs are very speculative investments. Investors should never participate unless they can financially afford to lose their entire investment. Also, always do your own research concerning the company involved in the ICO or IPO before investing. Ask questions and read all of the available information. The company should be able to answer all of your questions. ICOs and IPOs can be incredibly profitable for investors. Still, you can’t be too careful.
The Future of ICOs
The first ICO was conducted in July 2013. Additional ICOs were launched during the next three years, slowly gaining popularity. However, the real explosion occurred in 2017, when Bitcoin was setting new price records. ICO activity peaked in 2018, followed by a complete collapse in 2019. The number of ICOs in 2019 fell 91% compared to the record amount of activity in 2018.
What happened? Why did the ICO market experience such a dramatic decline in 2019? There are two reasons why ICO volume collapsed. First, the public enthusiasm for cryptocurrencies began to wane following the brutal price decline of Bitcoin beginning in 2018. Second, financial regulators began to crack down on ICO activity to minimize the amount of fraud and abuse among several unscrupulous business owners and ICO fundraisers. Despite their general disdain for over-zealous regulators, the vast majority of the crypto community welcomed the crackdown from the regulatory industry. Why? Because ICO fraud was ruining the good name of cryptocurrencies and digital assets. This explains why there was very little pushback from the crypto community when regulators stepped in.
ICO activity in 2020 has remained non-existent. Investors have completely lost interest in ICOs. Additionally, crypto start-up companies didn’t have the financial resources to hire a legal team to clear all of the ICO regulatory hurdles. Therefore, companies involved in crypto, blockchain, and decentralized finance are moving away from initial coin offerings, particularly companies with customers in the United States.
At least for now, it appears that initial coin offerings will no longer be used by start-up companies as a method to raise capital. Until financial regulators can provide a more coherent regulatory picture for the entire digital asset universe, crypto companies will find other sources of capital.
Brief Summary of ICOs
- Initial Coin Offering (ICO) is a type of funding that usually involves cryptocurrency.
- Typically, ICO is used as a source of capital for start-up crypto companies.
- ICO involves the issuance of coins or tokens in exchange for fiat money.
- The white paper provides investors with information concerning the ICO.
- The main difference between ICO and IPO is in regulation.
- ICO is largely unregulated, while IPO is highly regulated.
- ICO investors do not receive an ownership stake in the company.
- IPO investors own shares in the company, which represents percentage ownership.
- ICOs and IPOs are highly speculative investments.