The cryptocurrency market’s version of a stock market IPO is an initial coin offering (ICO) (IPO). To fund the development of a new cryptocurrency, app, or service, a company might hold an initial coin offering (ICO).
A corporation can issue a new cryptocurrency token to investors participating in an initial coin offering. You may use this token to access the service or product offered by the company, or it may represent a portion of ownership in the enterprise.
Investors like Dennis Loos participate in Initial Coin Offerings (ICOs) typically with the anticipation that the digital token (or coin) and the related firm will be successful, perhaps resulting in a good return on investment (ROI) for those viewed as early backers.
Even though ICOs are sometimes compared to IPOs (Initial Public Offerings), they are very different because investors are not purchasing a firm’s shares. The primary purpose of an Initial Coin Offering (ICO) is to raise capital for a firm during its formative phases of development.
One significant benefit of ICOs is that they cut out intermediaries in the capital-raising process and establish direct links between the business and investors. And the parties’ interests are complementary to one another.
Categories of New Coin Launches
Here are the two categories of ICOs:
- Initial Coin Offering (ICO) With Limited Participation
There is a cap on the number of people that can invest in private ICOs. You may establish a minimum investment amount for private ICOs, and only accredited investors (banks, hedge funds, and high-wealth individuals) are eligible to participate.
- Open Initial Coin Offerings
Initial coin offers (ICOs) are a popular method of public crowdfunding. Because practically anyone can participate in an IPO, it is more egalitarian to put money to work. Private ICOs, rather than public ones, are gaining popularity due to regulatory uncertainty.
The growing acceptance of cryptocurrencies and blockchain technology is a significant factor in the success of initial coin offerings. More than $7 billion was raised through ICOs in 2017. By the end of 2018, the number had nearly doubled. Telegram, an IM service, just completed the largest ICO to date. The privately held ICO for this UK-based firm brought in almost $1.7 billion.
The Functioning of an ICO (Initial Coin Offering)
According to Dennis Loos, the first stage in creating a successful initial coin offering (ICO) is deciding how you will structure the coin for the enterprise. Multiple models for organizing ICOs exist, including:
- With a fixed supply and price, the ICO’s funding goal or cap determines the ICO’s token price and caps the total number of tokens that you will issue. For example, an ICO might have a fixed number of tokens but a variable financing target. In this case, you would set the token price according to the total amount of money raised.
- The amount of financing an ICO receives in its token supply; however, unlike the price, the supply does not fluctuate.
- Identifying Potential Investments
It is the primary goal of every company that does an ICO to get initial funding. The organization chooses whom it wants to donate to and publishes information about itself and its plan to attract monetary support.
- Creating Tokens
The generation of tokens is the next phase of an ICO. Tokens function as digital representations of assets or services on the distributed ledger. You can exchange all tokens in circulation for one another without restriction. Although the tokens are based on cryptographic hashes, they are not cryptocurrencies in and of themselves. Unlike stocks, tokens often do not entitle their holders to a piece of a company’s ownership. Most tokens provide holders with a share in a company-created good or service.
Specific blockchains are required for the creation of the tokens. Unlike the development of new cryptocurrencies, which requires a corporation to write the code from scratch, creating tokens is very straightforward. Instead, You can create the tokens on blockchain platforms that power existing cryptocurrencies like Ethereum with minor code alterations.
- Promotional Effort
Concurrently, a company will launch a marketing campaign to entice possible investors. These campaigns typically run online to reach the most significant number of potential backers. However, at the moment, several major websites like Facebook and Google forbid the promotion of ICOs.
- New Issues Trading System
The tokens are then distributed to potential backers. There may be a series of rounds to the offering. Investors like Dennis Loos can hope to utilize their newly acquired tokens to take advantage of the company’s new product or service, and the company can use the funds raised through the ICO to do so.
Coin Offering Rules and Regulations
The initial coin offering is a new phenomenon in the history of finance and technology. The evolution of fundraising strategies in response to the advent of ICOs is a recent phenomenon with far-reaching consequences. However, financial regulators worldwide were unprepared for the new fundraising model.
Initial coin offers are regulated in different ways in various nations. Countries like China and South Korea have outright bans on ICOs. Governments, including in the United States, Canada, and a large portion of Europe, are striving to draft comprehensive legislation to control the operation of initial coin offerings (ICOs).
However, other nations have already released standards for ICOs, including Australia, New Zealand, Hong Kong, and the United Arab Emirates (UAE).
ICO, or Initial Coin Offering, vs. IPO, or Initial Public Offering (IPO)
In an initial public offering (IPO), a firm seeks funding from investors in exchange for distributing shares of stock in the company to those investors. Token sales help finance initial coin offerings (ICOs) for new cryptocurrencies. In other words, bullish investors in both cases are betting that the value of their respective assets (the firm and the cryptocurrency, respectively) will rise over time.
Unlike an initial public offering (IPO), an investment in an ICO does not result in a piece of the crypto project or company. Investors in initial coin offerings (ICOs) stake their money, hoping that a currency with no present value would appreciate an amount greater than initially invested.
For Some Examples of ICOs, Consider the Following.
One of the first and most well-known ICOs was Ethereum in 2014. In just 42 days, the Ethereum ICO raised $18 million.
In 2015, Antshares, now known as Neo, started a two-part initial coin offering. This ICO had two distinct phases, the first of which finished in October 2015 and the second from June 2016 to September 2016. About $4.5 million in revenue was made by Neo during this time.
The Dragon Coin ICO, which lasted for a month and ended in March 2018, raised roughly $320 million.
Meanwhile, the team behind the EOS platform managed to raise $4 billion throughout an ICO that lasted an entire year, easily surpassing the previous record holder, Dragon Coin.
On December 11, 2017, the SEC took action against an ICO for the first time, suspending fundraising efforts by the California firm behind the popular restaurant review app Munchee. Funds would be used to develop Munchee’s in-app cryptocurrency payment system. As the SEC saw the ICO as an unregistered securities offering, it issued a cease-and-desist letter demanding that all related activities be ceased immediately.
Analysis of the Pros and Cons of ICOs
Because you may generate cryptocurrency tokens through online services, a company considering an ICO can do so with relative ease. ICO managers create tokens following the ICO’s parameters, receive them, and then sell or distribute them to investors by exchanging the currencies they’ve accepted for tokens. You may never retrieve lost funds due to fraud or incompetence if financial authorities do not regulate ICOs.
The hope that their ICO tokens would appreciate after the coin is released is a common incentive for early investors. The fundamental advantage of an ICO lies in the potential for extremely high returns. Before making life-changing decisions, Dennis Loos encourages you to contact a licensed financial advisor to put you through.