Initial Coin Offering (ICO)

 

DEFINITION of 'Initial Coin Offering (ICO)'

For traditional companies, there are a few ways of going about raising funds necessary for development and expansion. A company can start small and grow as its profits allow, remaining beholden only to company owners but having to wait for funds to build up. Alternately, companies can look to outside investors for early support, providing them a quick influx of cash but typically coming with the trade-off of giving away a portion of ownership stake. Another method sees companies go public, earning funds from individual investors by selling shares through

 Initial Coin Offering (ICO) is the cryptocurrency space's rough equivalent to an IPO in the mainstream investment world. ICOs act as fundraisers of sorts; a company looking to create a new coin, app, or service launches an ICO. Next, interested investors buy in to the offering, either with fiat currency or with preexisting digital tokens like ether. In exchange for their support, investors receive a new cryptocurrency token specific to the ICO. Investors hope that the token will perform exceptionally well into the future, providing them with a stellar return on investment. The company holding the ICO uses the investor funds as a means of furthering its goals, launching its product, or starting its digital currency. ICOs are used by startups to bypass the rigorous and regulated capital-raising process required by venture capitalists or banks.

BREAKING DOWN 'Initial Coin Offering (ICO)'

This is the most basic definition of an ICO. However, there is much more to the trendy crowdfunding method than this. Indeed, just as ICOs have rapidly come to dominate attention in the cryptocurrency and blockchain industries, so too have they brought along challenges, risks, and unforeseen opportunities. Investors buy into ICOs in the hope of quick and powerful returns on their investments. The most successful ICOs over the past several years give investors reason to maintain this hope, as they have indeed produced tremendous returns. However, this investor enthusiasm also leads people astray. Because they are largely unregulated, ICOs have become a hub of frauds and scam artists, looking to prey on investors who are overzealous and underinformed.Below, we'll explore the ins and outs of ICOs, beginning with a thorough overview of the ICO process itself. We'll examine some of the benefits of ICOs as well as some of the most successful ICOs in history and where investors can go to seek out new ICOs in which to take part. Finally, we'll take a look at risks that investors take when they participate, in addition to criticisms of the ICO space.

The Basics of an ICO

When a cryptocurrency startup firm wants to raise money through an Initial Coin Offering (ICO), it usually creates a plan on a whitepaper which states what the project is about, what need(s) the project will fulfill upon completion, how much money is needed to undertake the venture, how much of the virtual tokens the pioneers of the project will keep for themselves, what type of money is accepted, and how long the ICO campaign will run for. During the ICO campaign, enthusiasts and supporters of the firm’s initiative buy some of the distributed cryptocoins with fiat or virtual currency. These coins are referred to as tokens and are similar to shares of a company sold to investors in an IPO-type transaction. If the money raised does not meet the minimum funds required by the firm, the money is returned to the backers and the ICO is deemed to be unsuccessful. If the funds requirements are met within the specified timeframe, the money raised is used to either initiate the new scheme or to complete it.

 

ICO Benefits: What's in it for the Investor?

In an IPO, an investor receives shares of stock in a company in exchange for her investment. In the case of an ICO, there are no shares to speak of. Instead, companies raising funds via ICO provide a blockchain equivalent to a share: a cryptocurrency token. In most cases, investors pay in a popular existing token like bitcoin or ether and receive a commensurate number of new tokens in exchange.It's worth noting just how easy it is for a company launching an ICO to make tokens. There are online services such as Token Factory that allow for the generation of cryptocurrency tokens in a matter of seconds. Investors should keep this in mind when remembering the differences between a share of stock and a token; a token does not have any inherent value. ICO managers generate tokens according to the terms of the ICO, receive them, and then distribute them per their plan by transfering them to individual investors.Early investors in an ICO operation are usually motivated to buy cryptocoins in the hope that the plan becomes successful after it launches. If this comes to pass, the value of the tokens they purchased during the ICO will climb above the price set during the ICO itself, and they will achieve overall gains. This is the primary benefit of an ICO: the potential for amazing returns.Indeed, ICOs have made many investors into millionaires. Take a look at the figures for 2017: That year, there were 435 successful ICOs, each raising an average of $12.7 million...the total amount raised for 2017 was $5.6 billion, with the 10 largest projects raising 25% of this total. Further, tokens purchased in ICOs returned an average of 12.8x the initial investment in dollar terms.The ICO space continues to balloon at a tremendous rate. In the first quarter of 2018, ICOs brought in $6.3 billion in funds, already outpacing the entire 2017 total in just 59% as many distinct ICO projects.

 

Most Successful ICOs

As the ICO space gets bigger and bigger, so too have the largest ICOs in history. When evaluating ICOs by size, one can consider both the amount of money raised in the ICO as well as the return on investment. Sometimes ICOs with a remarkable return on investment are not among the highest-earning projects, and vice versa. Ethereum's ICO in 2014 was an early pioneer, raising $18 million over a period of 42 days. Ethereum has proven to be crucial for the ICO space in general, thanks to its innovations with regard to decentralized apps (DApps). When it debuted, ether was priced at around $0.30; as of July 24th, 2018, it trades at $474.62, marking gains of close to 1,600x.In 2015, a two-phase ICO began for the company Antshares, which later rebranded to become NEO. The first phase of the ICO ended in October of 2015, and the second continued all the way until September of 2016. During this time, NEO earned about $4.5 million. While it is not one of the largest ICOs in terms of money raised, it has provided exceptional ROI for many eary investors. The price of NEO at the time of the ICO was about 3 cents, and at its peak it traded at roughly $50, marking an increase in price of about 150,000%.More recently, ICOs have generated significantly larger amounts in terms of total funds raised. The largest ICO by this metric is filecoin, a decentralized cloud storage project. During a one-month ICO ending in September of 2017, filecoin managed to raise about $257 million.