What is an ICO and How Does it Work? 0/0
What is an ICO and How Does it Work?
If you have been been following the cryptocurrency industry, you have probably heard about the term ICO. While you might be familiar with some popular cryptocurrencies like Bitcoin and Ether, the concept of an ICO might be a little confusing.
ICOs are a relatively new phenomenon but have quickly become a dominant topic of discussion within the cryptocurrency community. This article will give you a basic understanding of ICOs and how they operate with information on how you can benefit from them.
What is an ICO (Initial Coin Offering)?
ICO stands for Initial Coin Offering, it is basically a pre-sale of a cryptocurrency token that will be released. ICO is a fund raising campaign program conducted by emerging digital currency organization to fund their blockchain project.
An initial coin offering is similar in concept to an initial public offering (IPO), both a process in which companies raise capital, while an ICO is an investment that gives the investor a crypto token in return for investment, which is quite different to the issuance of securities as is the case in an IPO investment.
It is ultimately the process of crowdfunding a new cryptocurrency project, involving a token sale, with the cryptocurrency project raising capital to fund operations, with investors receiving an allocation of the project’s tokens in return.
ICOs tend to be open from between a few weeks to a month, though some have been open for longer and fund raising for a particular ICO possibly taking place on multiple occasions, unlike an IPO which is a onetime event.
How does an ICO work?
The very idea behind an ICO is simple: the company sells its assets (tokens) for fiat money or cryptocurrencies – Bitcoin (BTC), Ethereum (ETH), or any altcoin accepted. Token sales are the fundraising tools that provide companies with money they need to implement ideas presented to investors.
Before getting into the details, it’s worth providing some detail on the technologies behing an ICO- Blockchain and Smart Contract.
What is a Blockchain?
Cryptocurrencies are created using the blockchain technology. Basically, a block is a group of transactions and a chain is a group of blocks connected to each other. That is the origin of the word “blockchain”.
Blockchain is an incorruptible digital ledger of economic transactions that can be programmed to record, not just financial transactions, but anything of value. It’s essentially a digital spreadsheet that is duplicated across a network of computers.
A tech start-up team create an ICO using a blockchain-enabled ICO software platform, such as Ethereum. The platform is powered by cryptocurrency-based software tokens referred to as coins and tokens.
Crypto coins are generated on their personal blockchain while crypto tokens are created using an existing blockchain platform.
(For more on Coins and Tokens, read our guide on The Difference Between a Token and a Coin )
What is a Smart Contract?
Smart contracts are forms of computer programs that can be executed by a network of trustless nodes, without having to rely on any third party’s arbitration process. Developers uses a smart contract to create decentralised applications (dApps) that serve various purposes for users.
Smart contracts help you exchange money, property, shares, or anything of value in a transparent, conflict-free way while avoiding the services of a middleman.
Start ups kick start the ICO process by establishing the blockchain and set up of protocols and rules, at which point an ICO data is announced. While an ICO provides the capital to fund a particular project, it is also a way tech companies ensure the circulation of their tokens in the cryptocurrency market.
Tokens issued from an ICO will have a value, with the ICO allocating equivalent to equity to the token, which gives the investor ownership with voting rights and, in certain cases, qualifying for dividends.
The majority of ICOs involve the creation of a defined number of coins or tokens prior to sale. Some companies may decide to collect the investments and then issue tokens, based on the number of investments. While others may prefer to issue more tokens than could be potentially sold, performing an ICO and then destroying the unnecessary tokens.
ICO prices are usually established by the issuers. These prices are normally set in cryptocoins (Ether, Bitcoin and Litecoin), however, some projects accept fiat currencies from investors.
ICOs may have multiple rounds of fund raising, with coins or tokens on offer, increasing in value until the release date, with early investors likely to have greater rewards embedded within their tokens as an incentive.
ICOs conclude once the coins or tokens are tradable in the open market.
There are a number of sites that list current and upcoming initial coin offerings like Bitcaz, Bitsense.biz, Reddit and Cyber Fund.
As an Investor, how do i know a genuine ICO?
In vetting ICOs, there is no guarantee or sure fire way of distinguishing the good from the bad, investors needing to avoid scammers who are using ICOs to dupe investors out of funds.
Technology startups issue out ICOs for various projects to serve different purposes. To invest, the first step of the process is to identify which project or company launch is of most interest.
However, before you make an investment, you must consider the following factors:
Project: Interest in a particular project is usually the major factor that determines a successful ICO. A project that draws a large number of investors is most likely to succeed.
Competition: with too many projects being alike or with projects failing to reach expected levels, usually driving the value of initial coins to zero, leaving investors with invaluable tokens.
Team: An appealing project alone does not underlie a successful ICO. The key aspect to consider is qualified technical support of the campaign. A good technical team will ensure the good management of funds when the campaign is over. You must always checkout the technical team of a project, this can be found in the whitepaper.
Whitepaper: This provides an in-depth report on a particular project and the services it will provide for investors. A whitepaper contains more technical and concise information on the project that the start-up is building. This could include: The consensus algorithm the project decides to use, how the nodes that operate on project’s platform would function, the road map, and the token system.
A roadmap sets out a project’s objectives and a date for which they intend to achieve this by. A roadmap is important in managing the expectations of the people interested in a project. The more realistic the roadmap, the better managed the expectations of the stakeholders will be.
This section typically contains details on the sale of the token, such as: Duration of the token sale, the number of tokens that will be on sale, and how to participate in the token sale.
With the recent throng of ICOs, it is important to understand the information that startups present in their whitepapers. Very few people will want to invest in a project that doesn’t have a whitepaper, or a good whitepaper.
User Reviews: Although you will find most of the answers you need from an ICO, it is also very important you continue your research outside of the whitepaper and the projects website. Checking user reviews will give you a glimpse of what other investors think of the project. You can do this by joining their social media forums.
While ICOs present a sound investment oppurtunity, it is still new and have very little regulation. A lack of governance can lead investors down the garden path, with a lack of appropriate due diligence leaving investors open to Ponzi schemes and more.
Remember not to invest more than what you can afford to lose and to research the technology and team behind the project.
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