An ICO is an unregulated fundraising tool for various cryptocurrency businesses. It’s what startups use to bypass the regulated and rigorous capital raising process required by banks and venture capitalists. In such a company, a set percentage of the cryptocurrency is sold to the project initiator very early for other cryptocurrencies or legal tender.
How it is done
If a firm wants to raise money through an initial coin offering, there should be a white paper plan outlining the details of the project. It should define what it is about, what it needs, what it aims to accomplish. It should also state the amount of money that will be needed to carry out the entire enterprise and how much the pioneers will get to keep.
The plan should also specify which currency is accepted and how long the campaign is planned to run. During such a campaign, supporters and enthusiasts of the initiative will buy crypto-coins using virtual currency or fiat. Coins are called tokens and are very similar to shares of companies that are sold to investors during an IPO. If the minimum required funds are not reached, then the money is returned and the entire ICO is considered unsuccessful. If the requirements are met within a set period of time, the money can be used to start the scheme or even to complete it if it is still developing.
Investors who take part in a project at an early stage are mainly motivated to buy cryptocurrencies in the hope that the plan will be successful and that they will benefit more from it after the launch. Such projects have been very successful in various economies and this is the main thing that motivates investors.
Similarity
ICOs can be compared to crowdfunding and IPOs. As with an IPO, a start-up company must sell a stake in order to obtain funds to help the company’s operations. The only difference is that IPOs work with investors, while ICOs work closely with supporters who are very interested in new projects, just like crowdfunding events.
However, ICOs differ from crowdfunding in the sense that ICO proponents are usually motivated by the prospect of a large return on investment. Funds raised through crowdfunding are mostly donations. It is for this reason that ICOS are called crowdsale.
There have been many successful transactions so far. ICOs are an innovative tool in our digital age. However, it is important for investors to take precautions as some companies can turn out to be scams. This is because they are highly unregulated. The funding bodies are not involved, and if you lose funds through such initiatives, it is difficult to follow up to get compensation.
For this, there are some regions that do not allow ICOs at all. It is important to buy such currency only from verified sources to be safe.