What is an ICO
An initial coin offering (ICO) is an approach used by cryptocurrency startups to acquire the capital needed to turn their whitepaper into an actual product. A relevant comparison in the equity market is the initial public offering (IPO). However, in an ICO, the investor gets a stake in the product rather than a share of the company itself. In exchange for the funds that they get from investors, the company distributes cryptocurrency tokens. The investors then hope that the crypto will increase in value.
Notably, an ICO is a risky investment option since it is not regulated by any public agency. Besides, the decision to participate in the offering is founded on the content of the white paper rather than the actual progress of the company.
How an ICO works
The primary idea behind an ICO is to leverage the decentralized blockchain system as a way of raising the capital needed to implement the company’s plan. Upon formulating a feasible investment plan in the form of a white paper, the firm is now ready to create tokens.
A token is a tradable representation of a financial asset that relies on blockchain technology. The easiest way to understand the concept of a token is to think of a company’s stock. However, there is a distinctive difference between a stock and a token. With tokens, you do not get a share of the company. Instead, you will get a stake in the created product.
Besides, a token is not equivalent to a cryptocurrency. Instead, it is a modification of the crypto in question. As such, the company does not have to execute the entire coding process as though they were creating a new digital currency. Blockchain technology allows for the modification of the existing code to yield tokens.
After the successful creation of the tokens, the startup can then engage in marketing activities to attract the targeted investors. Subsequently, the company distributes the tokens to the investors in exchange for funds in the ICO. The process can take place in one or several rounds.
Difference between an ICO and IPO
In a layman’s language, an ICO is often referred to as a crypto equivalent of an initial public offering (IPO). While that is true, the difference between the two entities is more than that. On the one hand, both concepts are a way to fund a project. However, they occur at different stages of a company’s development.
With the IPO, the company is well-established and the product already operational. In contrast, an ICO usually occurs at the onset of the project as the company seeks funding to transform an idea into reality. Furthermore, in an IPO, the investors get a stake in the company. In comparison, the crypto you get from an ICO is often of minimal value. The participants can only hope that the currency will gain popularity and increase in worth.
Besides, ICOs are self-regulated. This is another reason why ICOs tend to be risky investments. Conversely, IPOs are regulated by government agencies, like the SEC (the Securities and Exchange Commission).
