An initial coin offering is closely related to an initial public offering (IPO). IPO is a process in which companies raise capital, while an ICO (Initial Coin Offering) is an investment that gives the investor a crypto coin.
Before getting into the details about ICO’s, it is worth providing some detail on tokens, cryptocurrencies and blockchains.
What is a Blockchain?
A blockchain is a reliable digital ledger of economic transactions that can be processed to record financial transactions and every other thing that involves value. Blockchain is basically a digital spreadsheet that is duplicated across a network of computers. Blockchain is designed to update its spreadsheets on a regular basis. With the way the information is regularly updated and not stored in just one location, it is considered to be truly public and easily regulated.
What are Tokens?
The coins offered during an ICO are known as tokens. These coins would be considered an equivalent to shares purchased in an IPO and are also referred to as crypto coins.
What are Cryptocurrencies?
These currencies are virtual or digital currency that uses cryptography for security. They are currencies that are not issued by any central authority, such as a central bank. Governments cannot interfere or manipulate. The cryptocurrencies transactions are anonymous in nature.
While this will be the closest format of an ICO to IPOs, most ICOs distribute tokens that are an asset giving every investor access to the highlights of a particular project instead of the ownership of the company itself.
It is the process of crowdfunding a new cryptocurrency project, which involves the sale of a token, and the cryptocurrency project raising capital to finance operations, with every investor receiving an allocation of the project’s tokens in return.
The availability of ICOs is between a few weeks to a month, though some ICO’s have been opened for longer and fundraising for a particular ICO possibly taking place on several occasions. This is very different from an IPO which is a onetime event.
Some Major Characteristics Of An ICO Include:
- Participation in a project which could either be economy or a Decentralized Autonomous Organization (DAO).
- Most ICOs involve the production of a defined number of tokens or coins prior to sale.
- The prices of ICOs are usually established by the creators of the project, DAO or economy.
- A Token ICOs sell a right of royalties or ownership to a project or DAO while Coin ICOs generally sell participation in an economy.
- ICOs may have several rounds of fundraising, with tokens or coins on offer, which will begin to increase in value until the release date, with early investors likely to have bigger rewards in their tokens as an incentive.
How Does ICO Work And How To Use ICO
Startups kick-start the ICO process by setting up the blockchain and preparing rules and protocols, at which point an ICO data is announced.
The next thing to do is to begin mining for coins that will be sold during the ICO. This can be achieved with social media sites, Reddit and a lot of cryptocurrency related websites.
During this process, the creators will make their final adjustments to make sure it’s smooth sailing by the time of the ICO.
The cryptocurrency creators will also need to join an exchange. Investors must have an account with the exchange to be able to buy the new cryptocurrency with other cryptocurrencies or purchase the new cryptocurrency with conventional currency.
Inactive and active ICOs can be found through various websites with the purchase of cryptocurrencies being made through the selected exchange, and investors also able to purchase directly through the creators official website.
For the purchase of new coins like Kraken, Bittrex, Poloniex, Livecoin, Bitlish, Space etc, exchanges that are widely recommended.
Are ICOs Legal?
There is precisely no straight answer for this question. Legally, ICOs have existed in a gray area because arguments can be made both against and for the fact that they’re just new and unregulated financial assets. The recent decision of the SEC has since managed to clear up some of that gray area. The token is simply a utility token in some cases, which means that it gives the owner access to a specific network or protocol; thus it may not be classified as a financial security. Also, if the token is an equity token, which means that its only purpose is to appreciate in value, then this looks more like a security.
While a lot of people purchase tokens to access the underlying platform in the future, it’s very hard to oppose the idea that most token purchases are for speculative investment purposes. This is quite easy to determine given the valuation figures for several projects that have yet to release a commercial product.