What Is An Initial Coin Offering (ICO) – Types, Its Work, And More
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An initial coin offering (ICO) is a capital raising activity in the cryptocurrency and block chain environment. ICO can be consider an initial public offering (IPO) that uses cryptocurrencies. However, it is not the most accurate comparison as there are critical differences between the two fundraising activities. Startups mainly use an ICO to raise capital.
The main benefit of ICOs is that they eliminate intermediaries from raising capital and create direct links between the company and the savers. In addition, the interests of both gatherings are allied.
Types Of Initial Coin Offerings
The Two Kinds Of Initial Coin Offerings Are Recorded Below:
- Private ICO
In the case of private initial coin offerings, only a limited number of investors can participate in the process. For example, only accredited investors (financial institutions and high net worth individuals) can join in private ICOs, and a company can set a minimum investment amount.
- Public ICOs
Initial public coin offerings are a form of crowdfunding aimed at the general public. The public offering is a democratized way of investing because almost anyone can become an investor. However, secluded ICOs are becoming a more viable option over public offerings due to regulatory concerns.
The growth of cryptocurrencies and blockchain technology is increasing the popularity of ICOs. In 2017, more than $7 billion was elevate with ICOs. In 2018, the number almost doubled. The largest ICO was conducted by Telegram, an instant messaging service provider. The UK-registered company has raised over $1.7 billion in a private ICO.
How Does An ICO Work?
An initial coin offering is a cultured process that requires in-depth knowledge of technology, finance, and law. The main idea of ICOs is to use the decentralized systems of blockchain technology in capital raising activities that align with the interests of different stakeholders. The steps of an ICO are list below:
1. Identification Of Investment Objectives
Every ICO begins with the company’s intention to raise capital. Then, the company identifies its fundraising goals and creates the relevant company or project documents for potential investors.
2. Creation Of Tokens
The next step in the initial coin contribution is the creation of tokens. Essentially, tokens are representations of an asset or utility on the blockchain. Tokens are fungible and also, exchangeable. They should not be disorder with cryptocurrencies because tokens are just modifications of existing cryptocurrencies. Unlike stocks, tokens generally do not represent an equity stake in a company. Still, most tokens give their holders an equity stake in a product or service created by the company.
3. Promotional Campaign
At the same time, a company often conducts an advertising campaign to attract potential investors. Please note that campaigns are generally conducted online to reach the broadest possible range of investors. However, several major online platforms such as Facebook and Google prohibit the promotion of ICOs.
4. Initial Offer
After the creation of the tokens, these investors will be offer. The offer can be built in several rounds. The company can then use the profits from the ICO to launch a new product or service, while investors can expect to use the purchased tokens to benefit from or on that product/service while waiting for the value of the tickets to increase.
CFI is the official wage-earner of the Financial Modeling & Estimate Analyst (FMVA)™ global certification program, designed to help anyone become a world-class financial analyst. To continue learning and progress in your career, the following additional resources will be helpful:
- Investing: A Beginner’s Guide
- private equity funds
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