What is Initial Coin Offering in Cryptocurrency?

An initial coin offering (ICO) is a type of fund-raising activity using cryptocurrency and blockchain technology. ICO is one of the ways to create cryptocurrencies that has become the most popular in recent years.

Initial Coin Offering
Initial Coin Offering in Cryptocurrency

What is Initial Coin Offering (ICO)?

Initial Coin Offering (ICO) generally involves selling a new cryptocurrency at a discount or ‘token’ as part of the way a business raises money. If that cryptocurrency is successful and its value appreciates, often based on speculation, just like stocks in the public market, the investor makes a profit.

An initial coin offering (ICO) is a cryptocurrency version of an initial public offering (IPO).

Initial Coin Offering is a financing mechanism through which cryptocurrencies are obtained or collected. This allows the launch of a service or even a new currency. In this way, the investor delivers cryptocurrencies and receives a token from the company in exchange. That token can be used for something within that company, being able to represent participation as an associate. 

Initial Coin Offerings are usually used by technology companies that want to develop a new application.

However, unlike the stock market, the token does not confer any ownership rights over the tech company, nor does it entitle the owner to any kind of cash flow such as dividends. Buyers can range from established venture capitals and family offices to less wealthy crypto fans.

Many ICOs are related to the development of cryptocurrencies, such as the creation of exchanges or platforms based on the blockchain. But other ICOs have also emerged to develop innovative technologies.

For example, one of the latest most revolutionary digital currencies is IOTA ( an open-source distributed ledger and cryptocurrency, focused on the Internet of Things).

The main objective of an ICO is to raise money to finance this project or technology. Its creators often use the internet to advertise themselves, through specialized web pages or advertisements, being able to reach a large audience.

Investing in a cryptocurrency can be risky, more so than traditional startup investing, but it is largely motivated by the explosive growth in the value of bitcoins. The increase in value in recent years helped introduce both bitcoin lovers and professional investors to ICOs.

How Does ICO (Initial Coin Offering) Work?

The process of an ICO is similar to an Initial Public Offering (IPO) of the stock market. The companies organize a marketing system to publicize the new currency. 

Normally they prepare a website, where they explain the project and post a document called a white paper. These “white papers” show the conditions of the cryptocurrency, the operation of its technology, its business model, and support. In addition to adding a roadmap of the entire creation process.

Investors, instead of obtaining shares, acquire coins or tokens. The tokens are usually used in the application of the project, although sometimes, they also grant voting rights or participation in the company’s future income.

Companies frequently organize a pre-ICO, where investors can obtain the tokens with significant discounts.

When the ICO achieves its funding goal, it stops. Once at this point, the normal thing is that the promoters of the ICO have the financing to develop the project. 

After this, the company will inform its investors (ICO buyers) of the evolution of the project and compliance with the roadmap.

In addition, in most cases, the responsible company negotiates with the exchanges it’s listing on these platforms. In this way, you can sell your cryptocurrencies if you do not agree with the tone your investment is taking.

There are cryptocurrencies that have appreciated considerably since their ICO. Others have sunk. It all depends on how the market values ​​the project and how its managers manage it.

When forming a new company or starting a new project, it is convenient to raise the necessary funds through an ICO to carry it out.

Create a technical document that will contain the description of the project, in addition to the need to be satisfied. Likewise, the required money, the tokens to be issued, and the time or validity are defined.

At the beginning of the campaign, it will begin to attract buyers of the token with cryptocurrencies.

If the necessary funds are obtained, they are available for the project and achieve all the objectives. If the goals are not met, the money (cryptocurrencies) could be returned, in which case the project has failed. 

The investor should always do research exhaustive of the ICO before making an investment. To find an ICO you just have to check the internet for new launches and opportunities.

Characteristics of an Initial Coin Offering (ICO)

The characteristics of an ICO are the following:

  • ICO is used in new companies (startups) to raise funds by offering and promoting their products and services.
  • It allows the formation or expansion of the capital of a company through the acquisition of cryptocurrencies.
  • ICO tokens are distributed over the internet, so there are no borders or limitations.
  • Depending on its purpose, ICO may resemble the actions of a company, allowing the participation of third parties.
  • There are no intermediaries, such as banks or securities dealers. You do not buy through any broker or platform, but directly from those responsible for the project. In this way, you avoid paying commissions.
  • There is no investment limit. The only limit is your confidence.
  • It is usually deregulated or outside the law.

You must understand and handle everything related to ICO use, as well as virtual wallets. The vast majority of ICOs lack legal regulations, so investors should do their research carefully before investing.

Many ICOs throughout the world have turned out to be very successful, managing to generate considerable profits for the investor. But, also, others have turned out to be fraudulent or simply did not achieve the objectives set and failed.

ICOs allow startups and other companies to raise capital much more easily than, for example, selling stocks or bonds or taking out loans. 

Each ICO has totally different characteristics, but its acquisition is usually similar. To buy tokens in an ICO it is important to carefully read its conditions.

The ICO market is still largely unregulated and they don’t need to deal with venture capitalists or banks. However, in the future, raising capital through an ICO can be expected to become increasingly complicated as the market matures and new regulations are introduced.

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