Initial coin offerings, known as ICOs for short, are a crowdfunding system for the funding and development of blockchain companies and cryptocurrency start-ups.
From 2018 until somewhat recently, ICOs had seemingly lost popularity. For now, ICOs have seemed to reclaim their former glory, leading to speculations of potential "red-tape" in the form of regulatory action anticipated by many, with authorities such as the SEC recently cracking down on Ripple, for instance. These situations do nothing for ICOs in regards to maintaining their relevancy, along with their ability to compete with traditional seed-investment methods.
Thus, whether you're a seasoned crypto-head or just an everyday investor, it is vital to weigh any pro's and con's while understanding any risk of potential legal upendings in the landscape that could affect your investment before jumping in.
History of Initial Coin Offerings
The first ICO distributed cryptocurrency was from Ripple Labs, with their controversial coin known as XRP. Ripple Labs began building a payment system that would become known as Ripple. In early 2013, approximately 100 billion XRP tokens were minted upon the ICOs completion, followed by token distribution.
Since then, numerous blockchain and cryptocurrency projects have successfully financed their start-up through ICOs. For instance, Lisk, whose ICO garnered around $5 million in early 2016, has funded several other cryptocurrencies with ICO's of their own. Ethereum (ETH) would, however, unequivocally become the most popular ICO funded cryptocurrency - it's hard to believe now that the Ethereum Foundation was briefly selling ETH for under a dollar in 2015!
How Does It Work?
Below I have listed several steps behind a successful token pre-sale, aka an ICO:
- A blockchain project is proposed to the public domain before start-up capital can be acquired through investors choosing to partake in the ICO.
- Usually, a research paper is made available to the public for reference to any technical details. Generally, this includes a project roadmap: a detailed timeline of planned development and more, commonly known as a white paper. The purpose of having a project whitepaper is to describe any technical details, business models, and overall providing a general outline for plans regarding development and future release dates.
- Around the same time, social awareness of the project is created - specifically through marketing campaigns via popular social media platforms and search engines.
- Eventually, the ICO token sale goes live - investors can begin buying the designated token in exchange for whichever cryptocurrency the creators behind an ICO accept for payment.
After an ICO's completion, once the sold tokens have completed the designated distribution phase (outlined in the white paper, usually), they become available for buying, selling, and public exchange.
Advantages of an Initial Coin Offering
Let us dive deeper into the many potential benefits of investing in an ICO:
- The token offering facility of ICOs makes them versatile and unique - issuers provide tokens they sell to investors for start-up capital fundraising.
- When compared to Initial Public Offerings, an ICO requires far less time. In a traditional market, an IPO cannot find nearly as many interested investors, whereas, in an ICO, the ability to have further reach and ensure an equal playing field for everybody is possible - all through the integration of blockchain technology and the Internet!
- Because the blockchain is just a digital distributed ledger, it provides all investors with knowledge about daily occurrences and happenings throughout the ICO process. This decentralized nature prevents an issuer from partaking in fraudulent activities that might otherwise occur without investors having an awareness.
Because the blockchain is a public ledger, investors can rest assured that none of their funds can fall victim to a dishonest team with ulterior motives who may decide to siphon out the funds elsewhere, in what is known as a classic exit-scam.
Yes - some scammers may create ICOs with the sole intent of ripping off investors for their hard-earned digital assets and currency. As always, the most crucial practice is that you do your own research!
In the end, ICOs are a game-changer for those looking for a viable yet modern investment strategy.
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