An ICO is a means of raising funds through unregulated means for various cryptocurrency companies. It’s something that startups use to avoid the strict, regulated process of raising capital required by banks and venture capitalists. In such a campaign, a certain percentage of cryptocurrency is sold to project backers very early for other cryptocurrencies or legal tender.
How it’s done
When a company wants to raise money using an initial coin offering, there must be a plan outlining the details of the project in the white paper. It must determine what the project consists of, what the project needs, what its purpose is to fulfill. Also, the money that will be needed to start the whole company and how much the pioneers will keep will have to be stated.
The plan should also mention the type of currency accepted and how long the campaign is intended to run. In such a campaign, supporters and fans of the initiative will buy crypto coins using virtual currency or fiat. Coins are called tokens and are very similar to company shares sold to investors in IPOs. If the required minimum funds are not reached, the money will be returned and the entire ICO is considered successful. Once the requirements are met within a specified period, the cash can be used to start the scheme or complete it if it is still in progress.
Investors who participate in the project at the beginning are mainly motivated to buy crypto-coins in the hope that the plan will be successful and they will get more value after the launch. Projects of this type have been very successful in different economies and this is the main thing that motivates investors.
ICOs can be compared to crowdfunding and IPOs. Like an IPO, a startup company must sell a stake in order to raise funds that will support the company’s operations. The only difference is that IPOs face investors, while ICOs are very enthusiastic about new projects and work like a crowdfunding event.
However, ICOs differ from crowdfunding in that backers of ICOs are usually motivated by the prospect of a high return on investment. Funds raised through crowdfunding are essentially donations. This is why ICOS call it crowd selling.
There have been many successful transactions so far. ICOs are innovative tools in our digital age. However, it is important for investors to take precautions as there are some fraudulent campaigns. This is because they are very unregulated. The financial authorities are not involved in this and if you lose funds through such initiatives, it is difficult to follow up for compensation.
In this regard, there are some regions that do not allow the use of ICOs. It is important to buy this money only from reliable sources, just to be safe.