What Are ICOs and How Do They Work?

In the world of crypto, all the latest platforms, products, or services are known as cryptocurrency projects. There was a time when crypto projects earned substantial funds by directly selling virtual coins and tokens to people and institutions through ICOs. For the very first time in 2013, ICO took place for the Master coin, and then there are many favorable ICOs after that. Ethereum, which is known as the second-best cryptocurrency in terms of market capitalization behind Bitcoin – the first-ever cryptocurrency conveniently tradable through the Bitcoin Union trading bot – started as an Initial Coin Offering (ICO). 

Initial Coin Offerings were particularly famous in 2017 & 2018, but several turned out to be scams. Individuals and institutional investors were tricked into getting significant returns, but they contained nothing in the end because the creators drained all their hard-earned funds and vanished.

The fame of Initial Coin Offerings diminished, partly because the Securities & Exchange Commission of the United States, along with other regulatory authorities, progressively repressed the ICOs. In addition to this, all the social media giants like Twitter, Facebook, and even Google also restricted the Initial Coin Offerings from ads.

What is an ICO?

An ICO is known as an Initial Coin Offering, which is an activity to raise capital in the environment of cryptocurrency and blockchain. You can consider an Initial Coin Offering (ICO) as an (IPO) Initial Public Offering that relies on cryptocurrencies. Anyhow, this is not the most accurate analogy because there exist many important differences between these activities of capital-raising. Projects initially rely on Initial Coin Offerings for fundraising. The major benefit of ICOs is that they eliminate the intermediaries or third parties from the process of fundraising and build direct links between the organization and the investors. Apart from this, the interests of both parties are intertwined.

Types Of ICOs

There are two types of ICOs, which are given below:

• Private ICOs

In the case of private ICOs, the number of individual or institutional investors who can take part in this process is limited. Usually, only authoritative and authenticated investors (individuals and institutions having significant net worth) can take part in private Initial Coin Offerings, and the company can decide the minimum amount that can be invested.

• Public ICOs

A public ICO is similar to crowdfunding and depends on the general public to raise capital. Public Coin Offerings can be considered as an investment that is democratic because anybody willing to invest can become a participant. Anyhow, because of some regulations, private initial coin offerings are turning out to be a more feasible choice than public ICOs.

How Do ICOs Work?

An ICO is an elegant process that demands a profound knowledge of three fields that includes technology, law, and finance. The basic idea of Initial Coin Offerings is to best utilize blockchain technology’s decentralized mechanism in the activities of fundraising, which would line up the interests of many stakeholders. An Initial Coin Offering includes the following steps:

• To Identify The Goals Of Investment

Every Initial Coin Offering begins with the intention of raising capital for the company. The company determines the goals behind the campaign to raise capital and prepares admissible material about the organization or the startup for prospective investors.

• To Create Tokens

A coin or token represents an asset in blockchain technology. These tokens are fungible, and you can use them for trading. Particular platforms of blockchain technology are used to create tokens. The token creation process is straightforward because an organization does not need to write codes like the latest cryptocurrencies. The blockchain platforms that already exist and running cryptocurrencies like Ethereum permit the token’s creation with some little changes to the existing codes.

• Campaigns To Promote

An organization typically runs a promotional campaign to capture the interest and attention of prospective investors. Keep in mind that campaigns are usually run online to get a wider reach of investors. Anyhow, numerous major internet-based platforms like Google and Facebook prohibit advertising of Initial Coin Offerings.

• Initial Offering

Once the token creation process is done, companies offer them to investors. There exist multiple rounds of offerings. The company can utilize those funds to start a new product, and the investors can use those tokens to get an advantage from them or hold them until the value of those tokens appreciates.