Initial Coin Offering or Initial Currency Offering is often referred to as an ICO, and it comes under cryptocurrency purview. ICO serves as a method of collecting funds for a company who is looking to launch a new coin or an app. Most of us would be familiar with IPOs (Initial Public Offering) to traditional companies. When a business is started, people initially would like to establish a brand for their product. Then gain profits and expand the market based on the profits that are gained. After some value or a brand is generated for the product or service that is being offered, businesses generally would like to go public by offering to sell a part of the company through shares to gain capital. This capital is infused in the business to expand to the other markets and grow eventually.
Thus, IPO’s come into picture where big players can step in, or even normal people could pitch in and buy shares of the company. Shareholders get to own a certain percentage of the company based on the number of shares one holds. Shareholders expect a return based on the performance of the company in the share market. The profits made by the company are distributed amongst the shareholders as a dividend. We have seen many successful IPOs by many smaller companies which have grown to be huge now. When millennials get to know about the IPOs of companies like Apple, Microsoft, Facebook and considering their share price now, often wonder how much money one could have made if invested when they have gone Public. Hence no wonder there is so much craze about ICOs amongst Millennials, especially after the Bitcoin boom. Let us see more about ICO’s below.
What is an ICO?
Let us understand the ICO in depth. ICO’s are offered by companies who are interested in developing new coins, apps or services. There could be different agendas for an ICO. Cryptocurrency Startups come up with a white paper with all the technical details, the amount required to fulfil the requirement, the business plan, the type of money that can be invested to buy the coins like fiat currency, or any other cryptocurrency. Most of the ICO’s accept either Bitcoin or Ether for the token purchase. The duration of the ICO will also be announced. During the period of ICO, the interested people will invest in the ICO in return for the tokens expecting huge profits based on the cryptocurrency boom so far. If the raised money meets the requirements of the project, the ICO is deemed to be successful. Else it would be considered to be failed, and the invested capital is returned to the investors. Smart contracts are used to sell the tokens as the ICO’s are decentralised directly. There is no central regulatory authority. The ICO’s are deemed to be same as crowdfunding or some people even call as crowd sales because of these features.
The first scalable cryptocurrency ‘Bitcoin’ never had an ICO. Bitcoins are continuously generated as the transactions are happening in the network, and to reward the miners for keeping the platform agile and running. As opposed to the bitcoin blockchain, token sales (ICO’s) enable investors to buy tokens for a fee before the project is initialised. This maintains a static flow of tokens and more tokens would be released to inflate the currency or liquidity by forking the network if required.
Some of the most successful ICO’s
The first-ever token sale was made by Mastercoin against Bitcoin in 2013. Mastercoin raised around 500,000 USD worth of Bitcoin then. It was the first successful ICO ever. Later many ICO’s took place taking inspiration from Mastercoin. The highly notable one was of Etherium, which raised around 42 million dollars in 42 days making the Etherium white paper a reality from a theoretical one. Later Etherium developed a platform with simple lines of code, essentially a smart contract allowing token sales in a very simplified manner. Thus, Etherium smart contracts simplified the process of issuing newly minted tokens for other tokens, thereby sparking a record-breaking ICO’s in 2016-17.
The DAO was one of the many token sales but a prominent one that was conducted on the Etherium platform, which raised around 150 million USD in Ether in four weeks. This ICO promised a proportional share for the investments in generated revenue in the future. But it ended prematurely because of the abnormal usage of funds creating a wide range of speculations in the community. This enabled a hard fork in the Etherium blockchain. In 2016-2017, as many as 800 ICO’s have been taken place raising around 20 billion USD.
Telegram, Augur, EOS and Ripple are some of the examples of successful ICO’s.
Prices of Tokens Issued
Since there is no regularity or any monitoring authority, the rates of token sales varied. Each ICO that is coming has different ways of selling their tokens. The price can be increased or decreased for a fixed period during the sale. The sale can start from the highest price and then price decreases proportionally over the sale period. Tokens can be sold based on the total funds raised as well. The percentage of the investor’s contribution proportional to the total funds raised will be allotted to the investor.
There is an extensive criticism on the way ICO’s are being held. In the initial days, the pioneers launched ICO’s to raise funding for the research and development for alternative blockchains as they have come to know for a broader range of people. In the later stages, ICO’s are being raised for any project, whether it is related to blockchain or not just with a mere idea or a marketing gimmick. No technical white paper or no much specifications are released. Many international scams have been unearthed. After a 2-year rally of ICO’s, and most of them being a failed one’s, investors have become wary and being more cautious. Because, no one can behold accountable for the failure and losses incurred by the investors as the whole process is online, decentralised with anonymity.
ICO’s have been a hot topic for some time now in the recent past, and the curiosity is growing more and more. At the same time, scams are increasing as well. Regularities are coming up but not enough to make is scam-free. We can only hope for better regulations to remove the scams that are taking place now completely. If you ever want to invest in an ICO, make sure you carefully research the background of the founders, read the official whitepaper and take the advice of an expert. Hope you had a good read. If you have any questions, let us know in the comments below.