What is an ICO in crypto? An Initial Coin Offering (ICO) is a method of raising funds used by cryptocurrency startups. The idea is to raise capital for their projects. It is similar to an Initial Public Offering (IPO) in the traditional stock market, but with some key differences.
What is an ICO in Crypto?
In an ICO, instead of selling shares in a company, the startup sells digital tokens or coins to investors in exchange for funding. Let’s break it down further.
How an Initial Coin Offering (ICO) Works
Ahead of an ICO, a startup creates a whitepaper that outlines the details of the project, including its goals, timeline and technical specifications. The whitepaper also describes how the digital tokens will be used within the project’s ecosystem. Investors who are interested in the project can purchase these tokens using established cryptocurrencies like Bitcoin or Ethereum.
ICOs have gained popularity due to their potential for high returns on investment. Early investors in successful ICOs have seen significant profits as the value of the tokens they purchased increased over time. Additionally, ICOs provide an opportunity for anyone to invest in startups that were previously only accessible to venture capitalists and wealthy individuals.
While ICOs can seem to offer interesting investment opportunities, they also come with some risks. One major risk is the lack of regulation and oversight in the cryptocurrency market. Unlike traditional financial markets, ICOs are not subject to strict regulations, which means investors may be more susceptible to fraud or scams.
ICO in Crypto: Stages of sales in an ICO
ICOs create and issue tokens or digital assets that they have created on a blockchain platform. After they have created a detailed whitepaper that outlines their vision, goals and technical aspects of their project, they can then move to sales.
Pre-sales and crowdsales are two methods used by ICOs to raise funds. During pre-sales, the project team sells tokens to a select group of investors before the official crowdsale begins.
This helps the crypto company to secure early funding and build interest in its project. Crowdsales, on the other hand, involve selling tokens to a larger audience, often through an online platform, allowing anyone to participate in the ICO.
To attract investors and promote a project, ICOs use various strategies such as marketing, bounty programs and partnerships.
Marketing involves spreading awareness about the project through different channels like social media, online advertisements and community engagement.
Bounty programs incentivise individuals to contribute to the project by offering rewards such as tokens or other benefits. Partnerships with other companies or organisations can help increase exposure and credibility for the ICO.
ICO in Crypto: Successful ICOs
Ethereum is a digital currency that is the foundation for decentralised applications that make use of smart contracts. The name is a little confusing. Ethereum is actually the network and ETH or Ether is the cryptocurrency, but the terms are used interchangeably. The crypto, ETH, is currently the second-largest crypto by market cap. Ethereum differs from Bitcoin in that it is not just a cryptocurrency, but also a platform for building decentralised applications.
Ether tokens were initially sold for US$0.31 each (AU$0.48), in July 2014. The all-time high price was US$4,310 (AU$6,693), recorded on Nov 10, 2021. As at the time of writing, Ether is sitting at US$1,579 (AU$2,451).
However the point of the ICO wasn’t necessarily to make the founders rich. Ethereum is a decentralised blockchain technology that lets people build and use communities, applications, organisations and digital assets. Ethereum is the blockchain of choice for developers and enterprises wanting to change how many industries operate and how we go about our daily lives.
Another example of a highly successful ICO is NEO (China’s Ethereum). The network gained massive support from the Chinese government, Microsoft and other major companies. In 2016 it had an initial token price of just over US$0.20 (AU$0.31) and reached an all-time high price of roughly US$198 (AU$308) in January of 2018.
At the time of writing, the coin was trading at US$7.44 (AU$11.60).
NEO positioned itself as China’s Ethereum. NEO is a blockchain ecosystem designed to be the infrastructure of a smart economy. The aim is to fully digitise assets and identities through smart contracts. And the blockchain is finding new uses every day.
NEO’s native tokens, NEO and NEO Gas, play crucial roles in the ecosystem. NEO represents ownership and management roles in the blockchain, while NEO Gas is used to pay for transactions.
NEO raised 6119 BTC during its 2016 ICO. Half of the NEO tokens were sold to buyers in the ICO. The other half were given to the NEO Council (the governing body managing the Neo Blockchain). The funds raised from the ICO were used to support the development and growth of the NEO blockchain ecosystem.
ICO in Crypto: Unsuccessful ICOs
One notable example of a failed cryptocurrency Initial Coin Offering (ICO) is the case of BitConnect. BitConnect was a cryptocurrency platform launched in 2017 via an ICO to raise funds for its lending and exchange platform. There are many reasons why BitConnect’s ICO was considered a failure.
Ponzi Scheme Allegations: BitConnect was accused of operating as a Ponzi scheme. It promised investors extremely high returns, often exceeding 1% daily, which is unsustainable and unrealistic in the legitimate financial world.
These high returns were primarily generated through a referral program that encouraged users to recruit new investors, and the platform used funds from new investors to pay returns to earlier investors. This classic Ponzi scheme structure ultimately led to its downfall.
Lack of Transparency: BitConnect lacked transparency about its business model and the technology behind its platform. It didn’t provide sufficient information about how it generated the promised returns or how its lending and exchange platform worked.
Regulatory Scrutiny: BitConnect faced increased regulatory scrutiny as authorities in multiple countries, including the United States and the United Kingdom, started investigating its operations. These investigations and cease-and-desist orders from regulators led to the closure of its lending and exchange platform.
Price Collapse: The value of BitConnect’s native token, BCC (BitConnect Coin), was highly volatile and largely dependent on new investments. When regulatory actions and negative media coverage started to pile up, investor confidence waned. As a result, the price of BCC plummeted, causing significant financial losses for investors who had purchased tokens during the ICO or through the platform.
Lawsuits: Many investors who lost money in BitConnect initiated legal action against the project’s promoters and affiliates. Several lawsuits were filed against individuals associated with BitConnect.
Ultimately, BitConnect’s ICO and associated lending and exchange platform collapsed in early 2018, leading to significant financial losses for many investors.
The project’s lack of transparency, unsustainable business model and allegations of fraudulent activity were key factors contributing to its failure.
BitConnect serves as a cautionary tale in the cryptocurrency space, highlighting the importance of conducting due diligence and being cautious when investing in ICOs or other crypto-related ventures.
Initial Coin Offering (ICO) vs. Initial Public Offering (IPO)
Let’s break down the difference. Initial Coin Offerings (ICOs) and Initial Public Offerings (IPOs) have made their mark in the financial world, yet they operate in vastly different realms.
Initial Coin Offering (ICO)
ICOs represent a fundraising method that harnesses blockchain technology to issue and distribute digital tokens or coins. These tokens often serve multiple purposes within a blockchain ecosystem, ranging from utility tokens, which grant access to a specific service or platform, to security tokens, which represent a share in the company’s assets and profits.
One of the primary attractions of ICOs is accessibility. They open investment opportunities to a global audience, allowing both accredited and retail investors to participate. ICOs also offer startups a streamlined way to raise capital without the regulatory burden associated with traditional IPOs.
However, their lack of regulation has led to a proliferation of scams and fraudulent ICOs, making due diligence a paramount concern for potential investors.
Initial Public Offering (IPO)
In stark contrast, Initial Public Offerings, or IPOs, have been a cornerstone of the traditional financial system for centuries. An IPO is how a private company goes public. It is the first time it offers shares of its stock to the public. This transition from private to public ownership involves extensive regulatory scrutiny and disclosure requirements to protect investors.
IPOs are typically undertaken by established companies with a proven track record and a desire to access large pools of capital to fuel growth. Investors who participate in IPOs acquire shares of the company’s stock, which can be traded on public stock exchanges like the New York Stock Exchange (NYSE) or NASDAQ. IPOs often represent a significant milestone for a company, bringing with them increased visibility and liquidity, and the potential for substantial capital infusion.
Key Differences and Considerations
Regulation: The most prominent distinction between ICOs and IPOs is the level of regulatory oversight. IPOs are heavily regulated by government agencies, while ICOs operate in a comparatively more relaxed environment. This regulatory divergence affects investor protection and the overall risk associated with each fundraising method.
Investor Base: ICOs have a broader reach, attracting a global network of investors, whereas IPOs typically target institutional investors and accredited individuals.
Asset Class: ICOs predominantly deal in cryptocurrency tokens, while IPOs involve the issuance of shares in the company’s equity. This means that ICO investors often acquire tokens with varying utility or ownership rights, whereas IPO investors become shareholders with voting power and the potential to earn dividends.
ICOs and IPOs represent distinct paths for raising capital, each with its own set of advantages and risks. ICOs offer accessibility and innovation but come with heightened regulatory and fraud concerns. IPOs, while heavily regulated, provide a more established route to public capital markets.
Advantages and Risks
Initial Coin Offerings (ICOs) have emerged as a revolutionary way for both investors and startups to engage in the fundraising process. However, like any investment opportunity, ICOs come with their own set of potential benefits and risks.
Potential Benefits of ICOs
Access to Innovative Projects: ICOs allow investors to access cutting-edge blockchain and cryptocurrency projects that may not be available through traditional investment channels. These projects often aim to disrupt existing industries or create entirely new ones.
Global Reach: ICOs are typically open to a global audience, enabling investors from around the world to participate. This global reach provides a diverse and potentially more significant investment pool.
Liquidity: In some cases, tokens acquired through ICOs can be traded on various cryptocurrency exchanges shortly after the ICO concludes, providing liquidity for investors who wish to buy or sell their tokens.
Early-Stage Investment: ICOs often target startups in their early stages. Getting in early can potentially lead to significant returns if the project becomes successful.
Decentralisation: ICOs align with the ethos of decentralisation, empowering both startups and investors by reducing the need for intermediaries such as banks or venture capitalists.
Potential Risks of ICOs
Lack of Regulation: One of the most significant risks associated with ICOs is the relative lack of regulatory oversight compared to traditional financial markets. This regulatory gap has led to numerous scams and fraudulent ICOs, making thorough due diligence crucial.
Volatility: The crypto market has extreme price volatility. The value of tokens acquired through an ICO can fluctuate wildly, potentially leading to substantial losses for investors.
Uncertain Future: Many ICOs are based on innovative ideas, but the success of these projects is far from guaranteed. The majority of startups face significant challenges and may fail, leaving investors with worthless tokens.
Market Saturation: The ICO market has seen explosive growth, leading to saturation and competition among projects. This can make it challenging to identify promising opportunities among the multitude of ICOs.
Lack of Investor Protection: ICO investors may have limited recourse in case of disputes or fraudulent activities, as the decentralised and pseudonymous nature of cryptocurrencies can make it difficult to trace rugpullers.
Regulatory Changes: As governments worldwide begin to address the regulatory gaps in the ICO space, rules and regulations may change rapidly, potentially impacting the legality and structure of ongoing ICOs.
ICO Regulations and Legal Considerations
In the relatively short history of Initial Coin Offerings (ICOs), they have risen from obscurity to become a prominent fundraising method. However, their rapid ascent has brought them under the scrutiny of regulators worldwide.
ICO regulations are a complex and ever-changing terrain that varies significantly from one jurisdiction to another. While some countries have embraced ICOs with open arms, others have imposed strict regulations, and some have banned them outright.
How to do Due diligence
Project Evaluation: Investors should scrutinise the ICO project’s whitepaper, team and roadmap. Assess the viability of the idea, the project’s technological underpinnings, and its potential market impact.
Regulatory Compliance: Ensure that the ICO complies with local and international regulations.
Team and Advisors: Investigate the background and credibility of the project’s team and advisors. Experience and expertise are crucial indicators of a project’s potential success.
Tokenomics: Analyse the tokenomics of the ICO, including the token’s supply, distribution and use cases. Assess whether it aligns with the project’s goals.
Community and Reputation: Gauge the project’s online presence, community support and reputation.
Conclusion: ICOs going into the future
Initial Coin Offerings have emerged as a groundbreaking mechanism that bridges traditional fundraising with the digital age. It’s clear that these offerings have disrupted the status quo, democratising access to investment opportunities and empowering innovative projects globally.
However, this revolutionary landscape is not without its challenges. Regulatory complexities, volatility and the ever-present risk of fraudulent offerings, underscore the importance of due diligence, careful research and a deep understanding of the ICO market.
Regulatory frameworks will hopefully strike a balance between fostering innovation and safeguarding investors.