What is an ICO?
ICOs have been around since 2013 and really picked up steam in 2017. But like so many other terms familiar to the crypto-community, an ICO is still an elusive term to the layperson.
The acronym ICO stands for Initial Coin Offering and is essentially the blockchain version of a Kickstarter or GoFundMe campaign. It’s an excellent way for startups to crowdsource the funding they need to take their project to the next level.
How do ICOs work?
An ICO is in some ways similar to an IPO, which is an Initial Public Offering a business runs when it goes on the stock market. The main difference between an ICO and an IPO, however, is that investors in an ICO do not own shares in the company they invest in.
Instead, investors receive some cryptocurrency tokens proportionate to their investment. The hope is that the business project running the ICO will be a success and that the value of the tokens will sky-rocket as a result.
What happens after an ICO?
Once the tokens have become valuable, they can get listed on international cryptocurrency exchanges alongside all the big boys like Bitcoin and Ethereum.
Ethereum, by the way, started as an ICO (they raised $18 million in 2014 by selling 50 million Ether tokens), as did Ripple, Stellar, and some other now-prominent cryptocurrency tokens.
2017 saw over 342 different tokens being released as part of ICOs that raised over $5.4 billion worth of funding for their projects. All that funding meant that ICOs overtook traditional venture capital funding as the preferred method of fundraising for blockchain companies.
That doesn’t mean it’s all peaches and cream, however. A study by Boston College found that more than half of all projects funded by ICOs failed within four months of being launched.
Are ICOs more likely to fail than other projects?
Well, no. Most startup businesses fail — that’s just a fact of life. ICOs are no more likely to fail than any other kind of business because ICOs are funding, well, businesses.
What makes an ICO become a success is the same things that many any other project a success. Is the project run by a competent team? Is it a good product or service? Will it satisfy the needs of its target market?
These are the aspects of an ICO you should look for if you’re considering investing — and the aspects you should work on if you’re considering launching your own ICO.
Benefits of an ICO
ICOs provide entrepreneurs in the blockchain space with a quick and efficient source of funding. Moreover, they retain full ownership of their company, compared with selling shares through an IPO. Investors have the opportunity to fund exciting and innovative projects on the cutting edge of technological development.
Risks of an ICO
ICOs can, like any other business, fail — and that means everyone loses their money. In that way, ICOs are no different from securing funding via venture capital firms. ICO investors don’t enjoy the same regulatory protection they would if they had invested in a more traditional way. Regulations will soon become more evident as more governments work out the kinks.
Interested in launching your own ICO? Read “Should You Launch An ICO?” to learn what’s involved.