What Is An Ico In Cryptocurrencies?

Oct 16, 2020 04:57 PM ET
What Is An Ico In Cryptocurrencies?

Overview

Cryptocurrencies have proven not to be a fad in recent years. Aside from the numerous coins that come into the market, another interesting aspect of the industry is initial coin offerings (ICOs). Touted as a revolutionary form of crowdfunding using cryptocurrencies, ICOs have disrupted the concept of start-up funding for a new coin, app, or service that doesn't need to rely on traditional credit-lending institutions. 

According to ICObench statistics, at least 5156 ICOs have seen the light of day since 2014. For the layman, the first step is defining what an ICO is and whether they are worthwhile investments.

Defining ICOs

Some have likened ICOs as a loose equivalent to IPOs in stock. While there is an apparent relationship with the terms and similarities do exist, there are also distinctions. Unlike the most common IPO nowadays which already has a working product, established market share, and tremendous revenue figures, an ICO is typically based on a project idea.

Anyone can propose an ICO for a new coin, app, or service. An example of an ICO for a brand-new coin which eventually became successful is Ethereum, which has become the second-most traded cryptocurrency. In its early days, the co-founder of Ethereum, Vitalik Buterin, created the whitepaper for the coin in late 2013 with what it aimed to achieve. 

Well before its official launch in July 2015, Ethererum had raised about $18.3 million from investors. Since its inception, Ethereum enjoyed a meteoric rise in 2017, hitting an all-time high price of roughly $1400. The coin has been lauded as arguably the most disruptive for its smart contracts and decentralization apps concepts.

EOS, another prominent cryptocurrency, is perhaps one of the highest-funded crowdfunding projects in history as it raised over $4 billion during its ICO stage. In 2017, like many prominent coins such as Ethereum and Litecoin, EOS also rose massively in value.

These examples should help us understand an ICO that proposes a new cryptocurrency from scratch and the lucrative potential for investors. The barriers to entry in this respects are a lot higher, requiring the expertise of highly experienced and knowledgeable software programmers. The other more popular alternative, which is much simpler, is ICO tokens. Most ICOs these days are based on tokens created from existing cryptocurrencies such as Ethereum, NEO, and EOS. 

ICO in cryptocurrencies

So, what are the basics of an ICO? The founders will typically create an extensive academic whitepaper that covers every single aspect of their project in a similar vein to Bitcoin and Ethereum. The crucial contemplations, as with any business venture, involve the technical, fundamental, and financial details of the project. We must bear in mind there may not be a prototype of the project in question. The founders should naturally spend a significant amount of time during this stage ranging from a few months to a few years. One of the primary considerations here would be the tokens, their buying process, the number of tokens, etc.

After this stage, the whole project, including its whitepaper, would be heavily marketed throughout the crypto community and general media to generate mass appeal from investors. After that, when enough interest has developed, the project would have an official ICO date, during which the following details will be made available:

  • The price of the tokens.

  • How long the project will run for.

  • The total number of tokens that would be sold.

  • How long buyers would need to hold the tokens for.

ICO in cryptocurrencies

The key transaction then would involve investors sending whichever cryptocurrency the token relies on (Ethereum, NEO, EOS, etc.) in return for the ICO tokens. At this point, after meeting the listing requirements to be available on a crypto exchange, the token would then be publically traded.

Pros and cons of investing in ICOs

Investing in ICOs has seemed riskier than IPOs for a few reasons. Largely due to the self-regulated nature of the crypto space, ICOs have been susceptible to massive scams in recent memory. One of the most notable scams in the industry was Bitconnect. Even though an open-source cryptocurrency existed for Bitconnect, it soon emerged the company was running an elaborate Ponzi scheme that eventually collapsed.

Some of these events have led to ICOs being banned altogether in places like China and South Korea. Not all countries enforce considerable regulations over ICOs, which, unfortunately, make it a chancier endeavor. These challenges are more at the forefront of prudent investors who still see the plus side of ICOs, which has always been owning a cheap asset that becomes valuable over time. To combat the shortfalls, investors thoroughly assess a clear use case and demand for the token to make it a meaningful investment. This analysis becomes increasingly important. Just as the IPO market is overly saturated, the same is true for ICOs.

There is another major consideration to note. ICOs do have a real possibility to become 'the new IPO process,' effectively making IPOs obsolete. This disruption could be seismic as it would affect many middlemen like investment banks, underwriters, and brokers typically involved in IPOs. A lot of paperwork, time, and red tape would all reduce tremendously, making the process faster and accessible.

Conclusion

The idea of ICOs, just as cryptocurrencies, is still an obscure one for a layman to understand. We can only hope the safety concern is more regulated in the future. This type of technology, which allows millions to partake in a pool-funding system almost solely through the internet, is fascinating. Added with the other possible disruptions to the IPO industry, we are living in exciting times indeed.


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