What is a First Coin Offering, or ICO?
An initial coin offering (ICO) is like an initial public offering (IPO) in Bitcoin. A business that wants to make a new coin, app, or service can use an ICO to get the money they need.
Anyone who wants to buy into an initial coin offering and get a new cryptocurrency ticket created by the company. This token might be helpful if the company sells a product or service. It could also be a stake in the business or project.
A look at how an Initial Coin Offering (ICO) works
An ICO is a way for a cryptocurrency project to raise money. The first thing the project organizers do is decide how they will build the coin. There are a few different ways that ICOs can be set up, such as:
Static supply and price: A business can set a specific funding goal or limit. This means that the total number of tokens available and the price at which they are sold during the ICO are fixed.
Fixed supply and changing prices: An ICO can have a fixed supply of tokens and a changing funding goal. This means that the price of each token is based on how much money the ICO raises.
When an ICO raises money, the number of tokens available changes, but the price stays the same. This is called a dynamic supply and steady price.
Release of a white paper
Along with planning the ICO, the crypto project usually writes a pitchbook, known as a “white paper” in the crypto world, and posts it on a new website just for the token so potential investors can read it. The people behind the project use the white paper to talk about important things about the ICO, such as:
About the project
- The need that the project would meet when it’s finished
- How much cash does the project need?
- How many of the virtual tokens are the leaders going to keep?
- What kind of money (currencies) can be used to pay?
- How long will the ICO plan last?
The project puts out the white paper as part of its initial coin offering (ICO) campaign, which is meant to get fans and followers to buy some of the tokens for the project. Most of the time, investors can buy the new tokens with fiat or digital currency. It’s also becoming more popular for investors to pay with other cryptocurrencies like Bitcoin or Ethereum. These new tokens are like stock shares sold to buyers during an initial public offering (IPO).
What does the money do?
If the money raised in an ICO is less than needed to meet the launch requirements, the buyers may get their money back. It would then be clear that the ICO failed. The money raised is used to reach the project’s goals, as long as the funding needs are met within the given time frame.
Who can start an ICO?
Anyone can start an ICO. ICOs aren’t regulated much in the U.S., so anyone with the right technology can start a new coin.
Because there aren’t many rules, someone could do anything to make you think they have an actual ICO and then take your money. An ICO is possibly one of the easiest ways to set up a scam to get money.
How to Invest in an ICO
There’s a new ICO that you want to buy into, but make sure you do your research first. The first step is ensuring the people behind the ICO are honest and responsible. Next, look into how the project leaders have previously worked with crypto and blockchain. A red flag is if the project doesn’t involve anyone with practical experience, which can be easily checked.
Anyone can set up and run an ICO, but that doesn’t mean everyone should. So, if you want to hold an initial coin offering, consider whether it would help your business.
Unique Things to Think About
In 2019, ICO activity started to drop sharply. This was partly because ICOs are legal but not transparent. People who want to invest can look into ICOs and find ones they want to join, but there is no safe way to keep up with all the latest ones. You can use sites like TopICOlist.com and others that list and compare ICOs.
The U.S. Securities and Exchange Commission (SEC) can get involved in an ICO if necessary. For example, the SEC brought an emergency action and got a temporary restraining order against the creator of Telegram after he raised $1.7 billion in an initial coin offering (ICO) in 2018 and 2019. They said the development team was doing something the U.S. District Court deemed illegal.2It for the Southern District of New York in March 2020. Telegram had to pay a civil fine of $18.5 million and return $1.2 billion to owners.3
When someone invests in an ICO, there’s no promise that they won’t lose money in a scam. To stay away from ICO scams, you can:
It’s essential that the people working on the project can explain their goals clearly.ICOs that do well usually have white papers that are easy to read and understand, and their goals are also apparent.
Try to find openness. Investors should expect a company starting an ICO to be completely honest with them.
Find out what the ICO’s legal rules are. Because traditional authorities don’t usually monitor this area, it’s up to the investor to ensure an ICO is real.
Make sure the money from the ICO is kept in a safe wallet. This kind of wallet needs multiple entry keys, which helps keep you safe from scams.
For some ICOs, you must use a different cryptocurrency to spend, meaning you might have to buy extra coins.
The ICO Hype
There is a lot of buzz around ICOs, and there are many websites where investors get together to discuss possibilities. Well-known artists, entertainers, and well-known people, like Steven Seagal, have also told their followers or fans to invest in a hot new ICO. 4 The SEC, on the other hand, warned buyers that it is against the law for celebrities to promote ICOs on social media without saying how much they were paid.5
Many famous people, like Floyd Mayweather Jr. and DJ Khaled, have pushed Centra Tech, an ICO that raised $30 million at the end of 2017.6. The court said that Centra Tech was a scam. As a result, the two celebs settled their charges with U.S. authorities, and three founders of Centra Tech pleaded guilty to ICO fraud.7
People who want to invest in ICOs should learn about cryptocurrencies and everything there is to know about ICOs before they join. Because ICOs aren’t controlled very well, people who want to invest should be careful.
Starting a business with a coin (ICO) vs. going public (IPO)
Initial public offerings (IPOs) allow companies to get money from investors. Investors get shares of the company’s stock. For ICOs, crypto companies sell coins or tokens to earn money. Investors are optimistic about the company or the coin and put money into it because they think its value will rise over time.
The main difference between an ICO and an IPO is that when you invest in an ICO, you don’t get a piece of the crypto project or business. People who take part in an initial coin offering (ICO) are betting that a currency with no current value will later gain value above its original purchase price.
ICOs are not controlled as much as IPOs are, and government agencies like the SEC closely watch them.8
While IPOs typically have the support of more cautious investors looking to make money, they may also receive funding from risk-tolerant supporters eager to invest in a fresh, exciting project. An ICO is not the same as a crowdfunding event because an ICO gives people a chance to make money over time, while crowdfunding projects only accept gifts. ICOs are sometimes called “crowdsales.”
What are the pros and cons of initial coin offerings?
Online services make it simple to create coin tokens, which is a big draw for businesses thinking about starting an ICO. ICO managers make tokens based on the rules of the ICO, receive them, and then send the tokens to individual investors by sending coins. However, because financial authorities don’t oversee ICOs, money lost through scams or carelessness might never be paid back.
People who buy early in an ICO usually do so because they think the tokens will increase in value after the cryptocurrency goes live. The main benefit of an ICO is the chance to make a lot of money.
But it’s not a given that cryptocurrency or other digital assets will always be acceptable. The People’s Bank of China legally forbade ICOs in 2017 because they were detrimental to financial and economic stability. 9 In 2021, the Chinese government made it illegal to mine cryptocurrencies and to buy or sell cryptocurrencies.10
Start-ups that offer cryptocurrencies
The 2014 ICO for Ethereum is an early and well-known example of an initial coin offering. Over 42 days, the Ethereum ICO raised $18 million. 11 There was a two-phase ICO for Antshares in 2015; the company later changed its name to Neo. This ICO had two stages. The first finished in October 2015, and the second ran until September 2016. Neo made around $4.5 million during this time.12
For another example, Dragon Coin earned about $320 million during an initial coin offering (ICO) that lasted one month and ended in March 2018.13Also in 2018, the company behind the EOS platform broke Dragon Coin’s record by holding an ICO that lasted a whole year and raised a massive $4 billion.14
The SEC’s first action against an ICO was on December 11, 2017, when it stopped an ICO by Munchee, a California company that makes an app for reviewing food. Munchee was trying to get money to make a cryptocurrency that could be used to buy food through the app. The SEC told the ICO to stop because it was selling securities without being registered with the SEC.15
How do you find out when new coins come out?
Many exchanges, websites, and groups of websites show new coins. CoinGecko, CoinMarketCap, Coinbase, and Gemini are a few examples. You can also find news about new coins on social media sites like Twitter.
Is it possible to do an initial coin offering (ICO)?
It is possible to do initial coin offerings (ICOs). If the project and coin don’t pass the Howey Test, used by the U.S. Securities and Exchange Commission (SEC) to see if an offering is an investment tool, then the ICO is against the law. The authors could create an agreement for future tokens (SAFT).
Why would you use an initial coin offering?
It costs a lot of money to make a blockchain and a bitcoin. Developers must pay for lawyers, programmers, space, and other costs. With an ICO, people can raise money to pay for developing a blockchain or coin.
Investing in cryptocurrencies and other initial coin offerings (ICOs) is dangerous and uncertain. This article does not suggest that you invest in cryptocurrencies or other ICOs by Investopedia or the author. Since everyone’s case is different, it’s always best to talk to a qualified professional before making financial decisions. There are no guarantees or claims from Investopedia that the information here is correct or up-to-date.
Conclusion
- ICOs, or initial coin offers, are a common way to get money for cryptocurrency-related goods and services.
- ICOs are like initial public offers (IPOs), but the coins in an ICO can also be used for a software service or product.
- A few ICOs have given buyers money back. Many others have turned out to be fakes or have done poorly.
- To join an ICO, you must first buy a more well-known digital currency and know how to use cryptocurrency wallets and marketplaces.
- Most initial coin offerings (ICOs) are not regulated, so investors must be cautious and thorough when studying and investing in them.
