In the traditional world, private companies raise funds through an Initial Public Offering (IPO) to expand and grow. Similarly, in the cryptocurrency space, crypto companies raise capital through Initial Coin Offering (ICO) for an upcoming project or to expand an existing project, be it an ecosystem, Dapp, a coin, or gaming.
Dating back to July 2013, the first ICO was held by Mastercoin. Following that Ethereum raised money with a token sale in 2014, raising around 31,000 BTC in July, equal to approximately $18.3 million at the time. Since then, ICO has gained massive momentum and popularity for raising capital, and as of 2017, ICOs had raised capital of almost 40 times the amount they did in 2016.
ICOs have become a significant way of raising funds for crypto start-ups wanting to launch a new project. Since ICOs are completely unregulated and have no barrier to entry, it becomes much easier for companies to generate tokens and launch an ICO campaign. Most of such projects are based on Ethereum or Stellar.
Similar to IPOs, ICO campaigns have the potential of very high returns and usually, the price of the tokens purchased during the campaign does escalate and give 2-5x returns.
What actually Is An ICO?
ICO is a process to raise capital by generating and selling tokens. The capital raised is further used to fund future projects and operations. The investors purchase these tokens with the hope of achieving high returns if the project succeeds or just trade the tokens later after getting desired returns.
ICOs, unlike IPOs, are a lot like crowdfunding. But they differ in the sense that the investors might receive high returns while crowdfunding is just mere donations. For this virtue, ICOs are also referred to as “crowd sales”.
How Does An ICO Work?
The company that wants to raise capital through an ICO creates a whitepaper, which explains what the project is all about, the objective and goal of the project, the amount of capital required for it, the number of tokens the founder will keep, and the number of days the campaign will run for.
The investors purchase the tokens issued to support the project and with the hope that the value of the tokens will increase in the future as the project scales up. If the ICO campaign meets the goal of raising the required amount of money, the fund raised is used to support the project. If the campaign fails to raise the minimum sum, the money may be returned back to the investors and the ICO will be deemed as unsuccessful.
In the case of most ICOs, the investor is required to purchase the tokens with a pre-existing coin such as Ethereum. Thus, as an investor, you need to have a cryptocurrency wallet set up for those coins and the tokens you want to buy.
Some Examples Of Successful ICOs Of All Time
Stratis is a startup based in the UK that created a platform to allow companies and developers to build, test, debug and deploy C# and .NET blockchain applications. Stratis also focuses on simplifying Blockchain complexities and offers Blockchain as a Service in order to help you avoid the expenses and complexities that go into purchasing and maintaining physical full nodes.
Stratis ICO was able to raise 948.15 BTC in 5 weeks distributing 84 million STRAT tokens to 509 investors.
Ethereum is not just a cryptocurrency. Vitalik Buterin designed Ethereum in order to allow developers to build applications based on smart contracts. Due to smart contracts, these special applications are self-executing in nature.
Selling tokens at $0.31, Ethereum ICO raised $18 Million in a span of 42 days. As of January 2018, the price of Ethereum hit $1,417 marking it as the world’s one of the most valuable cryptocurrency ecosystems.
How Is ICO Different From Other Offerings?
The advancement in the Cryptocurrency industry has paved the way for the emergence of various ways to start and raise funds. Some of the most popular offerings include ICO, IEO, and IDO. Although all of these are used to raise funds, there are major differences between them.
ICOs are based on Ethereum’s ERC-20 protocol standard. In an ICO, companies raise funds by selling a part of their tokens to investors. ICOs helped to raise millions of worth with a good example being the EOS project which raised more than $4 billion worth of money.
However, in 2018, the ICO bubble burst. Following this, 2019 marked the entry of Initial Exchange Offerings (IEO). IEOs were started by Binance launchpad with a similar way of crowdfunding as ICOs. IEOs were launched on popular exchange platforms such as Binance, OKEx, etc, and have a higher barrier to entry. Through an IEO, a project gets listed directly on an exchange unlike in an ICO. Some multi-million dollar companies that started off as IEOs include WazirX, Polygon (formerly known as MATIC), Elrond, etc.
A new offering — Initial DEX offering (IDO) paved its way during 2019. These token sales could have been brought up in seconds and thus made it difficult for average investors to even participate. The resentment gave birth to IDO launchpad platforms which became the new hype during 2020 and 2021.
What Makes A Successful ICO?
5 key factors affecting the success of an ICO include:
The tokens created should possess high potential in terms of both expansion and adaptability. For an ICO to be successful, there must be a balance between distribution and budgeting. If a large part of the tokens is held by a small group of owners, there’s a risk for investors because the price of these tokens could fall when the owners decide to sell them. Also, if the owners don’t hold a sufficient amount of tokens, they might face huge expenses in the future.
The tokens must have a clear vision that needs to be explained on the whitepaper. If it is created just to raise funds and for mere speculations, it might become unpredictable in the long run.
- Strong team
Having a credible team is one of the most important factors affecting the success of an ICO. A team consisting of well-known people in the cryptocurrency domain will attract investors and build trust. Cardano(ADA) is an amazing example of this, maintaining its rank among the top 10 cryptos even without a working product.
Investors usually look for the whitepaper of the project and the team behind it. The whitepaper must go into detail about the project, specifying its objectives. A whitepaper that lacks a practical approach for attaining the decided goals might fail to attract investors. A good whitepaper mentions reasonable goals with a clear timeline to achieve them.
- Investor interest
The technologies behind the projects must have a potential for scale and should be able to bring a positive change. Crypto investors are mostly young tech-savvy who are idealists and strongly believe in decentralization. Innovative technology that brings about a radical change in the existing market attracts these investors.
- The business case
An ICO must have something that sets it apart in a saturated market. For a business to have a successful ICO, it must have a clear target market, regulatory environment and must aim at solving a problem. The service offered by the business must have demand and true potential to bring a change. A company without competitors might depict that other businesses do not believe in its potential.
ICOs have huge potential for businesses, especially start-ups to raise funds and support their future projects. For investors, ICOs have been significantly providing high returns. Many investors in fact have turned into millionaires.
However, since ICOs are completely unregulated, there’s always a high risk of fraud and scams. Good research on the company before investing is always a good idea to avoid these scams.