What is an ICO?

What is the ICO fundraising method?

An Initial Coin Offering or ICO is a fundraising method utilized by start-up companies in the crypto space and shares similarities to an Initial Public Offering (IPO) which is found in stock markets.



In detail, the project owner would host token sales to raise capital funds for future coin, application or blockchain service developments. The coin owner companies would announce their ICOs together with whitepapers to provide detailed insight into the project, including coin distribution, capital funds and fundraising duration, all of which are provided for investors to have a look at for their decision-making processes.



*Note: If the fundraising event does not reach the projected goal, the ICO would be considered unsuccessful and the acquired funds would be re-directed back to investors.



The main drive to host an ICO is to allow developers to have the opportunity to acquire adequate funding for their projects, while also benefiting investors who would be able to purchase and hold on to the coins as well.



With the price being significantly low, coins created for ICOs often possess high growth potential, meaning that purchasing said coins during their ICO could result in large profit margins.





Pros



If the project proves successful, the coins generated from ICOs would be filled with immense potential of yielding profits in the future. To draw a picture, in 2017, coins purchased during ICOs provided an average profit rate of 12.8 fold.



An example of a successful ICO is Ethereum. During 2014, the project aspired to build innovative technologies, like Decentralized Applications (DApps), while also allowing the sales of Ether for fundraising.



After the project’s official launch, Ether’s value skyrocketed from its initial 20 THB price mark to the current 108,000 THB point, (as of May 5, 2021), accounting for a 5,400 times value increase.





Cons



Though coins purchased during ICOs can undeniably provide profitable gains, investments in this manner are highly risky as in the majority of the  ICOs, no central or government authority supervision is present. This means the event may not be required to follow regulations set by, for example, the SEC, which ultimately leaves room for potential scams and security breaches.



With the aforementioned risk taken into regard, social media platforms have banned ICO advertisements of all forms. Such platforms induce Facebook, Twitter and even Google.



To mitigate risks, individuals with interest in investing in such events have turned to IEOs (Initial Exchange Offerings), where exchange platforms act as the central authority managing the risks for investors, whilst also ensuring the security of their assets.





How to Participate in ICOs



Purchasing tokens in ICOs requires investors to have a crypto wallet of their own with various coins also settled within it. The reason behind the already-present coins is due to the fact that ICOs often require funds raised in the form of cryptocurrency coins, like Bitcoin or Ethereum.



After ticking this box, investors can research the technology and aspirations of the project and purchase the tokens after sufficient self-education. Points that are advised to be looked into specifically before investing include the terms and duration of the fundraising event, along with the currency required for purchasing, which tends to differentiate, depending on the project owner.



To reduce the plausibility of scams and security threats, investors are highly encouraged to conduct in-depth research before investing in Initial Coin Offerings. This should include the transparency and trustworthiness of the company and developers behind the project as well.





Reference:



Investopedia