An ICO is a means of raising funds in unregulated funds for various cryptocurrency ventures. It’s something startups use to bypass the regulated and rigorous capital-raising process required by banks and venture capitalists. In such a campaign, a percentage of the cryptocurrency is sold to project backers very early for other cryptocurrencies or legal tender.
How is it done
When a company wants to raise money using an initial coin offering, there must be a white paper plan outlining the details of the project. It should outline what the project is, what the project needs, what it aims to achieve. It should also state the money that will be needed to undertake the entire undertaking and how much the pioneers will be able to retain.
The plan should also mention the type of currency accepted and how long it intends to run the campaign. During such a campaign, supporters and enthusiasts of the initiative will buy the cryptocurrencies using virtual currency or fiat. Coins are called tokens and are very similar to company shares that are sold to investors during an IPO. If the minimum required funds are not reached, the money is refunded and the entire ICO is considered a failure. When the requirements are met within a certain period of time, the money can be used to start the scheme or even complete it if it is still progressing.
Investors who participate in the project early are mainly motivated to buy crypto coins, hoping that the plan will be successful and after the launch they will get more value from it. There are many successful projects of this type in different economies and this is one of the main things that motivate investors.
Similarities
ICOs can be compared to crowdfunding and IPOs. Just like with IPOs, the stake must be sold by a start-up company in order to raise funds to support such a company’s operations. The only difference is the fact that IPOs deal with investors while ICOs work closely with backers who are very passionate about new projects, just like the crowdfunding event.
However, ICOs differ from crowdfunding in the sense that ICO backers are usually motivated by the fact that they can get a large return on investment. Funds raised through crowdfunding are mainly donations. ICOS are called crowd selling for this reason.
There have been many successful deals so far. ICOs are an innovative tool in our digital age. However, it is important for investors to take precautions as there are some campaigns that can turn out to be fraudulent. This is because they are highly unregulated. The financial authorities are not involved in this and if you lose funds through such initiatives, it is difficult to follow up to get compensation.
For this purpose, there are some regions that do not allow the use of ICOs at all. It is important to only buy such currency from trusted sources to stay safe.