Whenever the talks about Bitcoin and other cryptocurrencies takes place, there is always a mention of ICO. For all those who are wondering what is it, let me give you a brief about it.
ICO means Initial Coin Offering. Sounds familiar? It is similar to IPO that is Initial Public Offering. In the market, when a company wants to gain funds from the public, they do so by offering shares to public in return for their investment which makes a company, a public company.
When a cryptocurrency startup who uses the concept of blockchain or has some new ideas for blockchain based product are lacking funds, they use ICO. ICO has supporters who are interested to invest in a new project with the motivation to gain higher returns. ICO is also called as IPCO – Initial Public Coin Offering. In ICO, a certain percentage of it is sold to the early backers of the project who in turn exchange it with other cryptocurrencies, mostly Bitcoin.
The next question that arises is why ICO?
It is a modern day technology which lets you raise funds. Like bitcoin and other cryptocurrencies, ICOs are decentralized which means that there is no authority to regulate them. There is no interference of Government. Also, there is no need for the tedious file work to be done. Thus, making it simple to raise funds. Also, taking part in ICO is easy as you just need to keep a track of upcoming ICO projects in the market.
On what basis are the funds raised?
When a company wishes to raise funds, they create a whitepaper. Over the last 3 – 4 years, Blockchain based company has raised over $1.3 Billion. Ethereum ICO raised $18 million in Bitcoin.
But, what is a whitepaper?
Whitepaper includes a complete information about the company and its project. This can be used by investors to know more about the company and make a decision regarding whether to invest or not. Whitepaper also shows how a real world problem is being solved by them.
It also states the requirement of funds to complete a project. How much coins which is similar to shares in IPO will be there in total. Here, coins are also referred as tokens. It also gives information regarding how many token will be kept with the company and how many will be available for public to invest in.
Other details related to the duration of ICO and the terms and conditions regarding the acceptance of payments are stated too. If the ICO is unable to reach the minimum target, then it is deemed as unsuccessful and the money is returned to the investors. If the target is reached, them the funds are used to either start the new product or to complete it.
To raise tokens, they are sold at very low price so that investors can purchase them with an aim to gain huge profits. It has been seen that the tokens increase by 5 – 10 times in a period of 2 – 4 months. Ethereum, NEO are examples which were highly profitable. It is also very important to remember that the price of cryptocurrencies are highly fluctuating and they vary with time.
There also are various fraudulent ICOs which scam people into investing in their company with the help of a fraud Whitepaper. They disappear with the funds as there is no legal authority available to monitor them. That’s why a complete research is essential before investing in an ICO.
Also, never be in a hurry to invest and be very careful about the same. Checking the Whitepaper, joining Forum and discussing about it on Facebook and Reddit can be helpful before taking a decision.
So whether to invest in ICO?
I would say that each coin has two sides, thus ICO too has some advantages as well as disadvantages. As they are innovative, they create new opportunities for developers to work on their ideas and being a change. This however, at times also leads to creation of projects which are fake. Investing in such projects can cause loss of investors.
As there is less paperwork required, they save time and money and the project can start as soon as the Whitepaper is made available. But, due to lack of authority, the number of scammers also increases. Thus, funds that are lost due to fraudulent initiatives may never be recovered.
The question of storing the token also arises as new ICOs are made. As the projects are not matured, finding wallets to store them becomes a difficult task. ICOs have proved to be highly profitable but there are also cases of whaling where, a single investor or a single group buys large number of tokens and sells it at higher price and thus they can manipulate the market. BAT ICO raised $35 million in just 24 seconds and 25% of the tokens were brought by a single investor.
In September 2017, ICOs were banned by People’s Bank of China as it caused financial instability and disruption to the economy. The Central Bank has stated that the tokens cannot be used as currency and no service related to ICOs will be offered by them.