How does an ICO work?
What does ICO stand for? ICO is the acronym for Initial Coin Offering, a type of unregulated fundraising used by companies in the crypto market to raise capital.
The ICO market is commonly compared to an Initial Public Offering (IPO) in traditional finance, although the ICO definition lacks any of the regulatory oversight that’s required of an IPO.
There have been many ICOs in recent years, with the list of ongoing initial coin offerings constantly growing.
Investors are motivated by the potential to make huge profits, as was the case when Ether launched it’s ICO in 2014, but due to the lack of regulatory oversight some of them ended in failure or were scams.
Typically, a company will publish a whitepaper outlining what their corporate goals are as well as details such as the number of coins being offered, the technology used and what the future use of the coins is intended to be.
The whitepaper will also outline what currencies are accepted, fiat and/or crypto, in exchange for the new coins and what the conversion rate for each is.
In many ICOs, the tokens will be attached to some form of functionality within the startup project. Some ICO examples of this would be video game creators, such as Axie Infinity, or someone launching a new marketplace, like Uniswap.
Advantages of ICO
One of the main advantages is the ease of launching an ICO for cryptocurrency startups. This allows prospective companies to bypass the substantial administrative burden of an IPO as well as test the waters with their idea without a huge capital investment.
In theory, if they are unsuccessful they simply return the money received and move on with minimal infrastructure already developed. Investors benefit from the potential to achieve high rates of return with a successful ICO.
Disadvantages of ICO
The ease of launching and lack of regulation around ICO have contributed to their reputation as a means for scammers to trick investors, who have few options for recourse.
The popularity of ICOd and their ability to raise large sums of capital so quickly has also garnered the attention of many world governments, with some like China cracking down on the industry in recent years.
The lack of regulation and potential for government backlash can be a deterrent for companies and investors alike. Investors should carefully research the company they are considering purchasing ICO tokens and consider any potential consequences in their home jurisdiction.
