How Initial Coin Offering Works?

Initial Coin Offerings (ICO) News

by DailyCryptoInfo 293 Views

How Initial Coin Offering Works?

Initial Coin Offerings (ICO) News

by DailyCryptoInfo 293 Views

An initial coin offering is essentially a fundraising tool. Firstly, a start-up can create a new cryptocurrency or digital token via a number of different platforms. One of those platforms is Ethereum which has a toolkit that lets a company create a digital coin.

There are over 1,000 digital tokens in existence, and this article will explore how an ICO works and how entrepreneurs are trying to tokenize business.

Then the company will eventually do a public ICO where retail investors can buy the newly-minted digital tokens. They will pay for the coins with other cryptocurrencies like bitcoin or ether (the native currency of the Ethereum network).

Unlike other fundraising methods such as an initial public offering (IPO) or even venture capital, the investor doesn’t get an equity stake in the company. If you buy shares in a public firm for example, you own a small slice of it. Instead, the promise of an ICO is that the coin can be used on a product that is eventually created. But there is also hope that the digital token will appreciate in value itself — and can then be traded for a profit. ICOs raised $3.8 billion in 2017.

What is An Initial Coin Offering?

ICO is the abbreviation of Initial Coin Offering. It means that someone offers investors some units of a new cryptocurrency or crypto-token in exchange against cryptocurrencies like Bitcoin or Ethereum. Since 2013 ICOs are often used to fund the development of new cryptocurrencies. The pre-created token can be easily sold and traded on all cryptocurrency exchanges if there is demand for them.

With the success of Ethereum ICO are more and more used to fund the development of a crypto project by releasing token which is somehow integrated into the project. With this turn, ICO has become a tool that could revolutionize not just currency but the whole financial system. ICO token could become the securities and shares of tomorrow.

How Initial Coin Offering Works?

The idea around an Initial Coin Offering, or ICO, is that you create a digital coin or token and then you offer this coin or token for sale in an initial offering. An ICO is in some ways similar to an initial public offering. Both are done to raise funds, but, instead of stock, your ICO purchase gets you a new type of coin or token, an asset rather than a security.

In the past two years, Initial Coin Offerings have been raising money at astonishing speed — amassing about $600 million, mostly for developers of early-stage projects. Many of these developers are raising millions of dollars with nothing more than a white paper and a cryptocoin dependent on a small network of nodes running their blockchain.

How Initial Coin Offering Works?


HOW IT WORKS:

- A tech start-up team creates an ICO using a blockchain-enabled software platform, such as Ethereum.

- The platform is powered by cryptography-based software tokens referred to as coins and tokens.

- The team produces a white paper to describe its idea in greater technical depth for the cryptocurrency community to review, ideally supported by a prototype.

- The team then crowdfunds (also known as a ‘network token presale’, ‘initial coin offering’, and 'ICO') - the project in an event that uses cryptographic tokens where part of its token pool is exchanged for money, to a community of developers and early adopters.

Only companies that develop products or services that incorporate a token in their solution should consider an ICO.

Ideally, your project should also satisfy the following attributes:

  • • Leadership and team with a proven ability to execute
  • • A viable business with a solid value proposition and business model
  • • Team with deep technical skills
  • • Whitepaper suggesting efficient use of funds and business-based thresholds for minimum and maximum raise
  • • Well-defined legal framework, preferably located outside of the United States (SEC v. W. J. Howey Co.)
  • • Scam protection
  • • A transparent ICO process
  • • Escrow
  • • Controlled release of funds
  • • Delayed founder liquidity

Legality

The legal state of ICO is mostly undefined. Ideally, the token is sold not as a financial asset but as a digital good like many other things. This is why ICO is often called “crowd sale”. In this case, in the most jurisdiction, the funding with an ICO is not regulated, which makes it extremely easy and paperless, given a lawyer experienced with the issue is on board.

However, some jurisdictions seem to be aware of ICO and tend to regulate them similar to the sale of shares and securities. The spectacular implosion of the DAO did a good job in kindle regulators attention. So while ICO currently mostly happen in a gray area, in the future they most likely will be regulated. This could bear some financial and legal risks for investors. Also, the cost and effort to comply with regulation could reduce the advantages of ICO compared with traditional means of funding.

Profit and Loss

Many ICO has been a lucky choice for investors. ETH, for example, was sold at 0.0005 Bitcoin and is worth today 0,05 BTC. Profit: 10,000 percent. Augur token (REP) were sold for around 0,005 each and are now traded at 0,01. The gain in value of 100 to 500 percent in Bitcoin is common for successful ICO.

On the other side, many ICO ends with losses. Cryptocurrencies like Lisk, IOTA-token or Omni did not hold the value in Bitcoin the token has been assessed at the ICO (or struggle to keep it). Often ICO is even used by scammers and semi-scammers: Build a glossy website, write some blocks of bullshit bingo, promise the greatest project/cryptocurrency ever, and be happy if you receive just 50 or 100 Bitcoin. Besides the large and successful ICO, like Lisk, Melonpost, Augur or Iconomi, many small and shady ICO did collect funds and delivered nothing at all.


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