Wondering what the ICO actually is? You’ve come to the right place! In this guide you will learn how public collections work and how to distinguish between a valuable project and a scam. So let’s get started!
ICO – what is it?
Initial Coin Offering (ICO) is a collection in which startups – i.e. companies just entering the market – can raise capital from potential investors. These funds are earmarked for the development of developed ideas. Many people claim that the ICO is a response of the crypto-currency industry to the so-called IPO – a public issue of shares enabling companies to raise capital to achieve their goals. The differences between the two ways of raising funds will be discussed in more detail in the next chapter, while we will focus on the ICO itself.
Within this type of financing, the company decides to issue tokens. What are they, actually? Well, it is nothing more than a digital unit representing a certain value. These coins, although similar to cryptocurrencies fulfil a number of different functions. Tokens can be used to build a relationship with the user, enter into interaction, and also to grant the right of ownership.
ICOs are most often created by companies that have a ready-made concept of a project or service, but lack the resources to implement it. In such a situation, startups start a collection, in which investors interested in their concept buy tokens emitted by them. These digital coins can represent both the participation in the project and the right to use a product or service offered by the company. However, it all depends on the individual plans and concepts chosen by the company.
How is the ICO created?
The success of an ICO depends to a large extent on the relations established with investors, a good concept and a valuable offer. It all starts with the announcement of the idea and the publication of a white book, which should contain all the details related to the project, including the business model or development plan. Initial announcements usually start on social media platforms such as Reddit. The community gets a chance to have a discussion within the project. In this way, the initiators of the project can also gain valuable tips and suggestions for improvements.
Then, the project team creates an agreement describing the terms of the transaction, the project life cycle, the target amount of the investment and the deadlines for achieving the set goals. The prepared offer defines the rules of tokens functioning and investors’ rights. It should be added that the sale of issued tokens may be carried out in several stages.
The key to a successful ICO is a well conducted marketing campaign. In a cryptographic environment there is a multitude of specialized agencies that help companies to sell their products to their target customers.
Interesting! Did you know that the first ICO was conducted in 2013 by Mastercoin? It took less than a month to collect, with 5,000 Bitcoins at that time worth $500,000.
Advantages and disadvantages of ICO
It should be noted that the fundamental difference between shares and tokens is that the latter do not have an intrinsic value or a legal guarantee. The creators of the ICOs issue them in accordance with the assumptions set out in the White Paper and then pass them on to investors. Users who decide to purchase tokens are mainly motivated by a low entry threshold and attractive promises related to the development of the project. If the startup is successful, the value of the tokens will increase above the initial price. This is the main advantage of the ICO.
However, it is also worth looking at the other side of the coin. Due to the fact that the blockchain and crypto industry is not fully regulated, on its stage there are many fraudsters who try to extort money from unwitting investors. Projects that run away with users’ capital are called exit scams. After collecting the appropriate amount of funds, they directly dissolve in the air. Supervisory authorities find it very difficult to recover stolen money.
How not to be fooled?
Make sure the project founders have clearly defined assumptions. A good ICO usually has clear documents with simple, concise and clearly defined objectives.
Find out who’s behind the project. See if its founders have enough experience to complete the project. Track their employment history, make sure they exist in the real world. Many fraudsters create false identities in order to gain trust from investors.
Make sure that the ICO funds are held in your deposit portfolio. Its phenomenon is that it requires multiple keys to access it. It provides effective protection against fraud, especially when a third neutral party has one of the following keys