An Initial Coin Offering is a fundraising source from crowd of cryptocurrency investors and markets. When a new currency is launched, the company needs initial funds to make it work and this is where ICO evolved.
The first ICO was by Mastercoin in 2013 which has raised approximately US$6lakh to create Bitcoin exchange.
How does it work?
There is a term called “IPO” – Initial public offerings. This term is popularly known when it comes to share market. Under IPO, companies sell their equity which is backed by tangible assets. While in case of ICOs, companies’ transfers/exchange their novel cryptocurrency which is known as Tokens. Beside this, for existing cryptocurrency, payment can be done using old-fashioned cash or often bitcoin and Ether.
How did Investors gain profit using ICO?
When investor’s token achieves more value at a rapid growth than the currency they utilized to pay for them. The value of these high performing tokens can only be significant when they are negotiable for legal tenders/goods or services.
However, these ICO fundraising are organized online and usually announced via cryptocurrency forums or through Event organizers. Though most projects among these have a white paper, a website or online forums for increased reach and publicity. ICO fundraising enable the creator distribute their new tokens alongside.
Features of ICO
- Participation in decentralized autonomous organization (DAO)
- Coin ICOs usually sell participation in an economy, on the other side token ICOs sell ownership right to DAO.
- However, investors will not always have right to vote if they own token also on the project direction/DAO.
- Most ICOs contain creation of pre-defined number of coins or tokens prior to sale.
- Usually the price of ICOs are determined by DAO
- ICOs will have different rounds of fund raising – Via tokens or coin on offer, swelling coin value until date of release, early investor announcement with embedded rewarded on their tokens as incentive.
- Once the tokens/coins are getting traded over the open market, ICOs will be over.
Related Coverage: Burger King in Russia has now its own cryptocurrency “Whopercoin”
Are ICOs successful?
As the alternate form of crowdfunding, ICOs has become the proven strategies for most new companies to make their project successful. ICOs will also have their pre-designated price which is static and price of which is not subjected to change during ICO period. This means that token supply is static. However, ICOs with static supply can also have dynamic funding goal. Under dynamic funding, token distribution will be made as per the fund received which increase token price as the fund budget increases.
Who regulates ICO?
Though within 7 months of 2017, 65 ICOs transactions were accomplished in China and now regulation on these ICOs are given importance.
In July, the investigation of the DAO has begun by US securities and Exchanges commission. It also proposed blockchain technology to facilitate DAO tokens to raise capital.
However, SEC determines that DAO tokens were securities and consequently those who offer and sell securities in the US need to comply with securities laws. Irrespective of whether those securities were exchanged with cryptocurrency or circulated with blockchain technology.