What is an ICO?

March 2, 2021

What is an ICO in cryptocurrency?

An Initial Coin Offering (mostly referred to as an ICO) is one of the most common forms of fundraising in cryptocurrency. It’s a way that startup cryptocurrency project founders will use to publicly sell their tokens in exchange for funds, such as Bitcoin or Ether. 

Because of the public-sale nature, ICOs are similar to Initial Public Offerings (IPOs). In this, investors will buy the crypto project tokens (which are similar to shares) and pay for them using cryptocurrency. 

The difference between an IPO and an ICO

One of the main differences between an ICO and an IPO is in the regulation. Before a company can issue an IPO a prospectus is required and must declare a number of things before it can be legally released. This includes the company’s intention in the release of its shares, the manner of transparency. The rationale behind the strict regulations of an IPO is to protect investors against scams and fraudulent schemes. 

On the other side of the coin, though, an ICO needs to jump through much fewer hoops. To release an ICO, a project simply needs to produce the white paper of a project. This document is designed to state the key information of the project, but there is no official standard of this paper. The risk involved here is that the founder of the ICO can omit or include information as they see fit, rather than according to any regulation. This could (and certainly has) lead to investors losing their funds to scam projects.

Because the legality needed for an ICO is so limited, it means that the project also does not need to have any track record or history for potential investors to see how the founder operates. With only the white paper needed to support the project, any reasonable evaluation of the project is based on the predicted future from the founder. 

The other difference between an ICO and IPO is that when you buy tokens in an ICO, you don’t purchase any ownership of the project. While shares represent ownership of a company, project tokens do not. 

The risk – or reward – of an ICO

Beyond the potential for fraud, one of the biggest risks involved in investing in an ICO is that the project might be sound and the technology could be incredible, but the founder might not be able to crack it. This means that the project, no matter how genuine or good, relies on the individual or team to ensure the success of the project.

Who can start an ICO?

Literally anyone can launch an initial coin offering. Simply needing a basis on the blockchain, a project requires only the white paper to launch an ICO. This is why ICOs are a little risky – as anyone could launch a scam but make it look legitimate enough to entice investors. One of the best pieces of advice to take when launching or investing in an ICO is to do thorough research. 

When launching a project, do thorough research before asking individuals to buy your cryptocurrency tokens. Test your technology, explore the sales or earning prospects for your investors and strategise how to market your product. Once you’re confident in releasing your project’s ICO, make sure you understand how to explain how your product or service offering in simple words. Anything too complex (especially when it comes to the cryptocurrency industry) might deter people from investing.

When investing in a project, do everything you can to do your homework about the project, the prospect, the founder and the white paper. Even if everything appears legit, lead in with caution before buying tokens.